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UNIT 20: Case Study

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EMBA (Oil & Gas Management)

MBCQ-724D

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Project Management &


Its Applications

Project Management & Its Applications

Course Design
Advisory Council
Chairman

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Dr Parag Diwan
Members
Dr Kamal Bansal
Dean

Dr Anirban Sengupta
Dean

Dr Ashish Bhardwaj
CIO

Dr S R Das
VP Academic Affairs

Dr Sanjay Mittal
Professor IIT Kanpur

Prof V K Nangia
IIT Roorkee

SLM Development Team


Wg Cdr P K Gupta
Dr Joji Rao
Dr Neeraj Anand

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Dr K K Pandey

Print Production
Mr Kapil Mehra
Manager Material

Author
R Mishra

Mr A N Sinha
Sr Manager Printing

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All rights reserved. No part of this work may be reproduced in any form, by mimeograph or any other means,
without permission in writing from MPower Applied Learning Enterprise.

Course Code: MBCQ-724D

Course Name: Project Management & Its Applications


Version: July 2013

MPower Applied Learning Enterprise

Contents
Block-I

UNIT 20: Case Study

Project Management An Overview ............................................................................. 3

Unit 2

Project Identification & Selection ................................................................................ 15

Unit 3

Project Feasibility Study .............................................................................................. 37

Unit 4

Project Feasibility Econometric Model ..................................................................... 51

Unit 5

Case Study .................................................................................................................... 67

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Unit 1

Block-II

Project Planning ........................................................................................................... 73

Unit 7

Project Cost and Risk Management ............................................................................ 87

Unit 8

Project Cost Contingency .......................................................................................... 99

Unit 9

Sensitivity Analysis.................................................................................................... 109

Unit 10

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Unit 6

Case Study .................................................................................................................. 117


Block-III

Unit 11
Unit 12
Unit 13
Unit 14
Unit 15

Initiating a Project...................................................................................................... 121


Project Execution ........................................................................................................ 137
Developing a Project Schedule ................................................................................... 145
PERT and CPM Techniques....................................................................................... 159
Case Study .................................................................................................................. 183

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Block-IV

Unit 16

Project Control ............................................................................................................ 187

Unit 17

Checking Project Progress with Bell and S Curves ............................................... 201

Unit 18

Project Costs Control .................................................................................................. 217

Unit 19

Project Controls to Minimize Cost and Schedule Overruns ..................................... 229

Unit 20

Case Study .................................................................................................................. 243

Project Management & Its Applications

iv

Block-V
Project Procurement Management ............................................................................ 249

Unit 22

Evaluating Bids for Major Equipment ...................................................................... 257

Unit 23

Attributes of a Good Project Manager ....................................................................... 273

Unit 24

Modern Trends............................................................................................................ 283

Unit 25

Case Study .................................................................................................................. 293

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Unit 21

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Glossary ............................................................................................................................................ 299

UNIT 1: Project Management An Overview

Notes

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BLOCK-I

Notes

Project Management & Its Applications

UNIT
1: PROJECT MANAGEMENT AN
___________________
OVERVIEW

UNIT 3: PROJECT FEASIBILITY STUDY


Introduction

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Introduction

Feasibility Study

Project Management Concept


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UNIT
2: PROJECT IDENTIFICATION &
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SELECTION
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Introduction
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Project Identification
Project Initiation
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Pre-feasibility Study
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Importance of Feasibility Studies
Project Break-even Point

Advantages of Conducting Project Feasibility Study


Types of Feasibility

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Need for Project Management


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Project Management Processes
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Detailed Contents

UNIT 4: PROJECT FEASIBILITY ECONOMETRIC


MODEL
Introduction

Capital Costs

Working Capital
Operating Costs

Product Revenues

The Econometric Model

Modifying the Variables

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UNIT 5: CASE STUDY

UNIT 1: Project Management An Overview

Unit 1

Project Management An
Overview

Notes
Activity
___________________
Draw
up
a
list
of
characteristics that distinguish
___________________
projects
from other activities.
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After completion of this unit, the students will be aware of the following
topics:
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Concept of Project Management

Need for Project Management

Project Management Processes

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Objectives

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Introduction

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This unit deals with the concept of project management. What is a


project?, Why it needs proper management?, etc. are explained
early. A project is a group of unique, inter-related activities that
are planned and executed in a certain sequence to create a unique
product or service, within a specific timeframe, budget and the
clients specifications. Some of the characteristics of the tasks that
qualify to be a project are: uniqueness, specificity of goal, sequence
of activities, specified time and interrelatedness. Projects are
carried out under many resource constraints and their success
depends on the ability of the manager to manage these constraints
effectively. Project management is the application of the
knowledge, skills, tools and techniques to project activities in order
to meet or exceed stakeholder needs and expectations. Every
project has a set of activities that are unique, which means it is the
first time that an organization handles that type of activity. These
activities do not repeat in the project under similar circumstances,
i.e. there will be something different in every activity or even if
the activity is repeated, the variables influencing it change every
time.

Project Management Concept


Project management is the application of knowledge, skills, tools
and techniques to a broad range of activities in order to meet the
requirements of the particular project. A project is a temporary

Project Management & Its Applications

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Project management is a specialised functional discipline that has


carved out its own place in management practice, education and
literature. We shall briefly address ourselves to two basic concepts
in order to arrive at a first-hand understanding of what is Project
Management. These two concepts are: Management and Project.
Management is an age old function. It is as old as the history of
human civilisation. Whenever more than one individual join
together to form a group and strive to achieve some common
purpose or objective, there arises a necessity to co-ordinate the
efforts of individual members of the group so that the individual
contributions add up to the largest total contribution possible.
Symbolically, it is very similar to pulling a very big weight by a
number of persons, the sum total of the force or pull that is exerted
on the weight is a function of the individual forces as well as the
directions in which each individual force is applied, relative to all
other forces. If all the forces are applied in the same direction, the
total force simply adds up.

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endeavour undertaken to achieve a particular aim. Project


management knowledge and practices are best described in terms
of their component processes. These processes can be placed into
five Process Groups: Initiating, Planning, Executing, Controlling
and Closing.

Notes

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However, as soon as there is a slight deviation in the direction


between the two individual forces, the resultant force is less than
the sum of the two forces. The more diverse the directions of these
forces are, the more the losses are. In an extreme situation, if the
forces are applied in opposite directions, the resultant force is the
difference of the two forces.
In large organisations where hundreds or thousands of individuals
are employed, co-ordinating the efforts of various individuals
towards the fulfilment of the organisation's goal is, in a sense, the
function of the management. Even the animal world displays coordinated efforts like the ants, honey-bees, etc. Therefore,
management as a function, has existed, all along and has
flourished in several human organisations, like the army, the
church, the missionary institutions, the government of a country
and so on. However, management, as a special discipline of study,
has come into the fore with the advent of the industrial revolution.
Let's now turn to projects. The word "Project" conjures up a picture
of something special, something which is different from routine

UNIT 1: Project Management An Overview

Notes

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and regular activities. For example, writing this chapter of this


book is a project for your author. He has dealt with this subject
over a number of years, but still then, writing this chapter is a
special task which he has undertaken. Other examples of a project
could be: building a house, organising a seminar, designing a new
product in the market, shifting to a new location, etc. Projects can,
therefore, be differentiated from regular operations on a number of
parameters as under:
Table 1.1: Parameters

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Explanation

Most of the projects are one time job as opposed to repetitive


regular jobs undertaken in a normal production situation. While a
project is in progress, usually, a large amount of resources are
deployed in terms of many diverse human resources, materials,
equipment, land, buildings, etc. However, while the project is on,
no benefits directly accrue from these investments. Projects are,
therefore, investments for future benefits. In accounting
terminology, no revenues accrue during the project stage. In
contrast to this, after a project is over and regular production
starts, we start getting the results of these investments in terms of
goods and/or services produced and revenues arising therefrom.

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It is the normal desire of each project owner that such revenues


would exceed the costs and thereby net some profits. Yet another
distinction of projects from regular operations arise out of a very
wide variety of skills used during the project and a relatively high
calibre of persons required possessing in these skills. This
requirement arises out of the special tasks which are undertaken
in a project which are not required to be carried out, once the

Project Management & Its Applications

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Projects also call for using special purposes equipment for


relatively short, periods during construction, testing and
commissioning. These include heavy duty mobile cranes, special
purpose testing equipment, and a host of construction equipment
which would not be required afterwards. In contrast, in a regular
operation situation, a limited number and variety of equipment are
in continuous use. Projects are also characterised by the
involvement of a large number of specialised agencies who can
mobiles the specialised skills, technology and managerial expertise
required for the project. Every phase of the project calls for
different abilities that are generally not required in regular
operations.

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project is complete. For example, any LPG bottling plant has


massive "Horton spheres" for bulk storage of LPG. These spheres
are made from special grade steel which must be welded together
so perfectly that every centimetre of the weld must pass ultrasonic
testing. Obviously, once a bottling plant has been constructed the
plant operation would not require any welding of this high calibre.
In contrast, in a regular operating situation a limited number of
skills are required and due to the process of repetitiveness,
learning by experience takes place. This reduces the initial skill
requirements of employees.

Notes

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The ability to identify feasible projects, the ability to amplify the


feasibility export into a detailed project report capable of execution,
to execute special tasks of constructing or executing projects and
the ability of commissioning new projects are entirely different
from the abilities of running an operating system. These abilities
are so diverse in nature that it is not possible to find a single
agency which can deliver the required results. Therefore, a host of
specialised agencies have come up specialising in some particular
sub-set of the overall tasks involved in a project. One cannot do
away with the involvement of such specialised agencies in a project
set up. In contrast, in a regular operating system, few external
agencies are involved and these are primarily restricted to the
buyers and the suppliers to the firm.
Finally, projects will use a wide variety of specialised technologies
which would not be required in regular operations. For example,
sand blasting may be used to remove rust from the surface of
structural before painting; special epoxy grouting may be used to
prevent water seepage in reinforced cement concrete foundations

UNIT 1: Project Management An Overview

Check Your Progress


True or False:

2.

Project Human Resource Management is a subset of


project management that includes the processes
required to ensure that the various elements of the
project are properly coordinated.

Project Integration Management is a subset of project


management that includes the processes required to
make the most effective use of the people involved with
the project.

Need for Project Management

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The basic purpose for initiating a project is to accomplish some


specific goals. A project helps to focus on the attainment of those
goals. In todays competitive era, in order to maximise the returns,
it becomes very important to manage the projects effectively. Faced
with unprecedented growth in business, todays corporate world
needs proper and effective project management.
Project management is vital for the success of a project. Without
proper project management, there are chances that the teams may
pursue the wrong goals, may not include the right mix of
personalities or skills, may be impeded by organizational
dysfunctionality, or may not deliver as much value as possible.
Project management helps an organisation execute a project
successfully by:
Helping an organisation prevent failures in projects. A project
requires huge investments and a loss in any project would
have direct or indirect impact on the society.

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Notes
Activity
Give___________________
an example of a project
in each one of the following
___________________
sectors:
(a) ___________________
Manufacturing
(b) Banking
___________________
(c) Marketing
(d) ___________________
R&D

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or in-situ heat treatment of massive structures may be


undertaken. Similar technologies would never again be needed
during the normal course of operations.

Helping an organisation define and control project scope.


Helping managers understand the project and its purpose. As
lack of understanding of the project among the managers leads
to failure.

(e) ___________________
Health
(f)

Science
___________________
(g) Nation
___________________
___________________
___________________

Project Management & Its Applications

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Assessing and mitigating the risks change of the technology


used during the course of project implementation.

Notes

Helping identify and communicate the problem areas.

Project management provides a shared vision to the project team


to guide their day-to-day work much more actively. The team
members are expected to focus exclusively on this shared vision.
Their sharp focus leads them to greater productivity.

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The project manager is responsible for optimizing the productivity


of his team. In simple terms, it is his responsibility to do
everything possible to minimize the obstacles. The project manager
is expected to coordinate and integrate all activities needed to
reach the project's goals.
In particular, the project form of organization allows the manager
to be responsive to:
the client and the environment,

identify and correct problems at an early stage,

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make timely decisions about trade-offs between conflicting


project goals, and
ensure that managers of the separate tasks that comprise the
project do not optimize the performance of their individual
tasks at the expense of the total project.

Practical experiences of several organizations prove that project


management helps them to experience better control and better
customer relations, and probably an increase in their project's
return on investment. A significant proportion of users also report
shorter development times, lower costs, higher quality and
reliability, and higher profit margins. Other reported advantages
include
a
sharper
orientation
toward
results,
better
interdepartmental coordination, and higher worker morale.

Check Your Progress

Fill in the blanks:


1.

In competitive era, it becomes very important for


managers to manage the effectively in
order to maximise the returns.

2.

helps an organisation prevent failures


in projects.

UNIT 1: Project Management An Overview

Project Management Processes

Project
Management
Processes

Notes
Activity
___________________
Make
a presentation on the
process
of
project
___________________
management.

Project management consists of the following interacting processes


organised in groups:

___________________
___________________

Project processes

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___________________

Process
interactions

Process groups

Customisation

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Figure 1.1: Project Management Processes

Project Processes

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It is a series of activities to accomplish the target. Project process


is classified into two main categories. These categories are:

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Project Management Process: Project management process


is defined by the organisation. It describes and organises the
work of the project.

Product-oriented Process: Product-oriented process defined


by the life cycle. It specifies and creates products and related
works.

Process Groups

Project processes are categorised under five process groups. Figure


1.2 shows the connection between process groups in a Phase.
Initiating

Planning

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Executing

Controlling

Closing

Figure 1.2: Connection between Process Groups

Let us look at process given in above figure one by one. These are:
Initiating processes
commitment.

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initiate

the

project

and

ascertain

Planning processes are meant for devising and maintaining a


workable scheme to accomplish the business need.

Project Management & Its Applications

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Executing processes are used for coordinating people to carry


out the plan.

Notes

Controlling processes monitor and measure progress and take


remedial action.
Closing processes are meant for formalizing acceptance and
bringing project to an orderly end.

Process Groups and Knowledge Area Matrix

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10

As we have studied in earlier section, project management is


composed of 44 processes that are mapped to one of nine project
management knowledge areas. Each of these processes also falls
into one of the five process groups. This gives us a matrix structure
wherein every process can be related to one knowledge area and
one process group. The following table 1.2 presents this matrix.
Table 1.2: Process Groups and Knowledge Areas Matrix

Knowledge
Area
Processes

Developing
Project Charter

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Project
Management
Integration

Project Management Process Groups

Initiating
Process
Group

Project Scope
Management

Project Time
Management

Developing
Preliminary
Project Scope
Statement

Planning Process
Group

Executing
Process
Group

Monitoring
and
Controlling
Process Group

Develop Project
Management
Plan

Direct and
Manage
Project
Execution

Monitor and
Control
Project Work

Scope Planning

Closing
Process
Group
Close
Project

Integrated
Change
Control
Scope
Verification

Scope Definition
Scope WBS

Scope Control

Activity
Definition

Schedule
Control

Activity
Sequencing
Activity Resource
Estimating
Activity Duration
Estimation
Schedule
Development

Project Cost
Management

Cost Estimating

Cost Control

Project Quality
Management

Quality Planning

Perform
Quality
Assurance

Perform
Quality
Control

Project Human
Resources
Management

Human Resources
Planning

Acquire
Project
Team

Manage
Project Team

Cost Budgeting

Develop
Project
Team
Contd...

UNIT 1: Project Management An Overview


Communications
Planning

Project
Procurement
Planning

Plan Purchase
and Acquisitions

Information
Distribution

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Performance
Reporting

Notes

Manage
Stakeholders

Plan Contracting

Request
Seller
Responses

Contract
Administratio
n

Contract
Closure

Select
Sellers
Risk Management
Planning
Risk
Identification
Qualitative Risk
Analysis
Quantitative Risk
Analysis
Risk Response
Planning

Process Interactions

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Risk
Monitoring
and Control

The individual processes overlap and interact throughout a project


or its various phases such as initiating processes, planning
processes, executing processes, controlling processes and closing
processes. the common features of process interactions are:

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Inputs: It refers to the client documents converted to action


plans to be acted upon.

Tools and Techniques: It refers to the mechanisms applied


on to the inputs to create desired outputs.
Outputs: It refers to the documents that are results of the
process.

Customisation

Sometimes project management processes need to be customised


based on the requirement of the product. Some examples of
customisation are given below:
Large Projects may need Details: A detailed project
management plan might be necessary to indicate every detail
in the initial stages.

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Project Risk
Management

Project
Communication
Management

Smaller Projects may need Relatively Less Details: A


detailed plan may not be required in the initial stages.
Process Details might Change for Other Reasons:
Resource identification might be required for scope definition.

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Project Management & Its Applications

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Check Your Progress

Notes
___________________

Fill in the blanks:

___________________

1.

Project management consists of interacting processes


namely , , interactions,
and which are organised in groups.

2.

Project process is classified into and


process.

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Summary

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The activities inside an organisation are generally organised into


groups, which fall into two categoriesoperations and projects.
Operations usually consist of on-going routine work, whereas a
project has a goal to generate a unique product, service, or result in
a finite time that is, it has a planned beginning and a planned end.

___________________

Organisations launch projects for different reasons, such as to


meet a business or legal requirement, or to take on an opportunity
offered by the market. The project management is the application
of knowledge and skills to project activities in order to meet the
project objectives. It involves performing a set of processes that
constitute nine knowledge areas of project management. Each
process is part of a knowledge area and has a membership in one of
the five process groups: initiating, planning, executing, monitoring/
controlling, and closing. The process groups represent different
stages of a project lifecycle.

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After going through this unit, you must have realised the
importance of project management in business applications and
the scope of project planning. Also, you are now familiar with the
various phases involved in project management.

Lesson End Activity


Explain about fitting projects in the parent organisation.

Keywords
Project Budget: The amount and distribution of money allocated
to a project.

UNIT 1: Project Management An Overview

Project Integration Management: A subset of project


management that includes the processes required to ensure that
the various elements of the project are properly coordinated.

Project Procurement Management: A subset that includes the


processes required to acquire goods and services to attain project
scope from outside the performing organisation.
Project Scope: Various parameters those affect the project in its
planning, formulation and execution.

Questions for Discussion


What is project management?

2.

Why is it important to study project management?

3.

Define project management, resource and process.

4.

Why project management is important?

5.

What are the steps in good project management?

6.

Explain the five dimensions that must be managed on a


project.

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1.

Further Readings
Books

Clements/Gido, Effective Project Management, Thomson.


Clifford F. Gray and Erik W. Larson, Project Management, Tata
McGraw Hill.

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Notes

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Project Management: The job of organising, coordinating and


managing various tasks and resources in order to successfully
complete a project.

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Project Cycle: A collection of generally sequential project phases


whose name and number are determined by the control needs of
the organisation/s involved in the project

Dennis Lock, Project Management, Ninth Edition, Gower.

K. Nagarajan, Project Management, Third Edition, New Age


International.

Prasanna Chandra, Projects-Planning, Selection, Financing,


Implementation and Review, Sixth Edition, Tata McGraw Hill.

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Project Management & Its Applications

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Vasant Desai, Project Management, Second Revised Edition,


Himalaya Publishing House.

Web Readings

www.col.org/SiteCollectionDocuments/SuccessProjMgt.pdf
www.pma-india.org/- Trinidad and Tobago

www.nickjenkins.net/prose/projectPrimer.p

www.mpug.com/Pages/WhatisProjectManagement.aspx
www.mindtools.com/pages/main/newMN_PPM.htm

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P.C.K. Rao, Project Management and Control, Sultan Chand &


Sons.

Notes

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14

UNIT 2: Project Identification & Selection

Unit 2

15

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Objectives

Project Identification

Project Initiation

Pre-feasibility Study

Importance of Feasibility Studies

Project Break-even Point

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After completion of this unit, the students will be aware of the following
topics:
\

Project Identification & Selection

Notes
Activity
___________________
Make
an assignment on
Project Identification.
___________________

___________________
___________________
___________________
___________________
___________________

Introduction

)U

In the previous unit, you have studied about the concept and
meaning of project management and also studied its importance in
todays competitive world. Identification and selection of a project
is one of the crucial and significant steps in the project
management process. This is an important stage that affects the
whole process including the long run sustainability of the project
after completion and transferring to make it operational. Project
ideas are vague in ab initio and they need to be realised through
proper planning and scheduling on the employability of resources.
Project ideas are usually balanced with the needs or demands of
the business, economy, or community perspectives. All those units
involved in dreaming for such project ideas need to carefully design
and draft their strategic plans to commensurate with the larger
interests.

Project Identification

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Project Identification is a continuous and repetitive process


involving screening, documentation, validation, ranking and
approval of viable project ideas for an organization. The
systematic effort of screening the ideas generated through various
sources and bringing out most viable and feasible alternative
project ideas is the domain of Project Identification. While
examining the filtered project ideas for further approval, it is
imperative to check on the availability of resources and potential

Project Management & Its Applications

Notes
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___________________
___________________

skills to execute the project and make it realisable. It will be a


futile boondoggle to select such an idea for which potential skills
are either unavailable and or resources are insufficient to deploy.
Thus, identifying a worthy project idea is not a simple mechanism
rather calls for a conscious and robust investigation on the part of
the organisation.

___________________

___________________
___________________
___________________
___________________

Project ideas are mere day dreams unless appropriate steps are
considered to make them see the light of the day. Project ideas are
usually the brain child of a forced situation or assumed by the
generator, yet it will be under incubation till a comprehensive
framework developed around the clouded idea. The process of
project identification can broadly be divided into four stages:

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___________________

Steps in Project Identification

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___________________

16

Figure 2.1: Steps in Project Identification

Firstly, the conceptual stage focus on generating a number of


project ideas through an interaction amongst various groups of
intellectually and entrepreneurially inclined people in the
organisation having good knowledge and concern about the field
where contributions are sought. In this connection, a deep study on
the potentialities of development vis-a-vis number of problems,
needs and aspirations of the people affected due to such project
idea. For example an Aerodrome project in the vicinity of a
developing city. Consideration of the problems that the people of
that city will face due to the impact of noise pollution, traffic,
evacuation from the area to other non-developed areas, etc. other
than operational issues that may crop up later.
Secondly, the screening stage begins with filtering out to eliminate
all those ideas that are either too ambitious to get into or too
cumbersome and clumsy to perform thereby resulting into nonviability and not feasible to undertake them as they appear
gloomy. Therefore, it is understandable that all the given project
ideas would not pass the screening test and only few get short

UNIT 2: Project Identification & Selection

Notes

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___________________
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The third and fourth stages can be termed as investment


opportunity study. It is a preliminary level investigation, yet
extensively conducted to analyse fundamental strengths of the
project idea, and to explore various opportunities of the project. It
has a limited objective of providing planners with a choice of
project alternatives from which they can make a selection.

17

listed for further examination. Such short listed ideas only will be
considered while promoting pre-feasibility studies.

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Pre-feasibility study focuses on answering the essential questions


such as; should we proceed with the proposed project idea? What
are the benefits and drawbacks of proposed project idea? How
much time will it take to conduct the preliminary study i.e. prefeasibility study on the financial and other related economic
aspects of the project viability? In order to support those
prefeasibility studies, all the organizational efforts get directed
towards compiling suitable answers to those questions. After
gaining confidence through the answers so supplied, a prefeasibility study will be commenced either by the internal sources
or by outsourcing to consultants. Furthermore, upon the
satisfaction of prefeasibility report, a detailed feasibility studies
can be conducted to document a detailed project report.

Importance of Project Identification

Project identification helps solve major problems in the planning


stage and addresses to meet diverse needs, while setting clear
objectives of proposed project. Good projects act as catalysts for
economic growth and development, which help to put streamline
the fruitful ideas through appropriate actions and achieve desired
results. This encourages creativity and innovation so as to optimise
the resources utilisation that is available in the economy, viz.
manpower, capital, and raw materials and so on. Project
identification helps the management in the following ways:

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identifies and analyses the purpose and scope of a project in


the given situation of an organisation or an economy
encourages value addition to the existing wealth and capital of
an organisation or economy as the case may be through raising
more funds for project execution
encourages multi-cultural environment and gives scope of
social and cultural compatibility in the organisation as well as
economy

___________________
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___________________
___________________
___________________

Project Management & Its Applications

___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________

Improves and develops the specific and general infrastructure


of an organisation and the economy

Notes

Determines basic benchmarks for deciding on various types


and forms of project ideas to materialise
Helps Identify size of investment and indicates on the
complexity of the project

Helps define the location and find appropriate technology to be


used while executing the project

PE

18

Helps to formulate better marketing strategies to enhance


profitability
Identifies different constraints in project environment and
formulation
Evaluates the potential resources to convert an idea into
reality
Analyse the policies of government and various legal
restrictions

(c

)U

Sources for New Project Ideas

Following are some of the sources from which new project ideas
may emerge.

Performance of Existing Industries


The present trends and past experiences of industries provide a
good indication about the health of a particular industry. Changing
profitability structure and break-even analysis of industries offer
adequate information about the financial health of various
industrial sectors. This provides a superficial outlook on the
industrial health, and thus a carefully forecasted trend lines help
in determining the future prospects emerging project proposals. It
is necessary to carefully analyse the changing phases of business
cycles in which different industries play their respective roles from
time to time. For example, the telecommunications sector
especially mobile communications is growing tremendously in
India having a mobile market crossing 5 billion by the beginning of
2012. This ever growing market gives the investors good chance to
innovate cheap and trendy designer mobile instruments that can
withstand rigorous utility. Chinese manufacturers are taking
advantage of this growing market by distributing mobile sets at
moderate prices to attract the consumers.

UNIT 2: Project Identification & Selection

Availability of Raw Materials

19

Availability of Skilled Labour

)U

Not all projects can be implemented universally. There are specific


projects which need defined locations, specified environmental
conditions and suitable manpower resources. For instance, cement
manufacturing unit, automobile manufacturing unit, textile units,
pharmaceutical units, sugar factories, power plants, etc. All these
projects need not only good infrastructure base but also to be
supported by appropriate technology and availability of suitable
manpower. Gujarat state is suitable for Cement industries, which
is why most of the cement manufacturers are situated in that area
to drain out chemical waste into sea waters. Mobility of manpower
and also natural environment such as water and coal is a major
challenge, which is why power projects are developed in the areas
surrounded by water facilities and coal mines. Solar and wind
power projects are developed in Rajasthan and Shimla where
abundant heat is produced through sand and sun and heavy winds
pass through to produce power by maintaining good environmental
and duly supported by UNIDO.

Import/Export Statistics

(c

Notes

___________________
___________________
___________________
___________________
___________________

PE

Availability of suitable resources is a must for any project to take


off. Easy availability of good quality raw materials at cheaper
prices is a boon for any project and thus can be evolved
accordingly. Identifying appropriate technology and resource base
will help design a good project idea and also make use of those
untapped resources for the betterment of the organisation as well
as economic health. For example, Hydrogen can be tapped as a fuel
to run motor car, and a good indicator to innovate new kind of
machines to fit in similar to that of CNG and Natural Gas engines
once got innovated for the emerging automobile sector. These new
resources will help the organisation have an edge over its
competitors and also help economy boost its GDP.

Statistics on international trade also gives scope to evolve good


projects. Fruits, handicrafts, cereals, pulses, drugs, etc. all have
equal opportunity to get exported as well as imported depending on
the demand by the country from time to time. Therefore, a clear
understanding on the routine and specific international
transactions between various segments of society will make project
ideas clearer and help reveal potential areas. Usually it is

___________________
___________________
___________________
___________________
___________________

Project Management & Its Applications

___________________
___________________
___________________
___________________
___________________

understood that any product having high imports can be thought


as potential project proposal for indigenous development and vice
versa. It may not be true in all cases. For example, 80% of the
caprolactum (raw material used to manufacture NFY) gets
imported in India and SRF thought of developing the project
during early 1990s but unable to do so due to heavy cost factors. It
is found that importing costs are less than cost of indigenous
development.

Notes

PE

20

___________________

Price Trend

___________________

Price of the product is a major driving force for any project to take
off. Fundamentally every organisation will have twin focus, profit
maximisation and cost minimisation. From both the angles it is the
price that gets determined and thereby guides the project initiator
on the functionality. If the general price level is found to be rising
over the past few years and a specific item is having a steeper rise,
that would indicate a huge gap in the demand-supply and can be
thought as a project opportunity. According to one of the market
structures, like monopoly, this situation arises and we know that
market demand is not met in full and a good scope to operate to fill
the gap.

___________________
___________________

(c

)U

___________________

Data from Various Sources

Various publications of Government, banks and financial


institutions,
consultancy
organization,
manufacturer's
associations, export promotion councils, research institutions and
international agencies contain data and statistics which may
indicate prospective ventures. A study of the balance sheets of
existing companies will be useful in knowing the sectors of
industry that are performing well. Study of profitability, breakeven level, earnings per share (EPS) of various industries may
indicate those industries where opportunities exist for new
investments.

Check Your Progress

Fill in the blanks:


1.

is a repeatable process for documenting,


validating, ranking and approving candidate projects
within an organization.

2.

Project identification sets the for selecting


a project.

UNIT 2: Project Identification & Selection

Project Initiation

21

Notes
Activity
___________________
Provide
a narrative description
of this problematic situation in
___________________
Project
Initiation and then
identify or solve the problem.
___________________
___________________
___________________

PE

The Project Initiation Phase is the 1st phase in the Project


Management Life Cycle, as it involves starting up a new project.
You can start a new project by defining its objectives, scope,
purpose and deliverables to be produced. You'll also hire your
project team, setup the Project Office and review the project, to
gain approval to begin the next phase.
The purpose of project initiation is to begin to define the overall
parameters of a project and establish the appropriate project
management and quality environment required to complete the
project. Development of the Project Charter is a pivotal starting
point for the project, establishing the project definition that will
serve as the foundation for all future efforts.

)U

Project charter is a statement of the scope, objectives and


participants of the project. It provides a preliminary delineation of
roles, responsibilities and authority of the project manager.

Figure 2.2: Process Flow

(c

At the beginning of project Initiation, a project manager is


assigned. The project manager works with the project sponsor to
identify the necessary resources and team members required to
further develop the key project parametersCost, Scope, Schedule,
and Quality (CSSQ). The project team documents its charge in the
form of a project charter, which is based on the project proposal
and business case. Approval of the project charter by the project
sponsor authorizes the designated team to begin project planning.

___________________
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___________________
___________________
___________________

Project Management & Its Applications

___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________

A project is initiated and submitted to the competent authority for


approval. On approval, the project is taken up for further
processing.

Formulate a Case Study

Notes

Evaluate all proposed projects that has been provided by the client
organization or that has been gathered by technical analyst. If
additional information is needed, issue an information request to
the requester. Formulate a case study and assign the nominated
project a new project code. The business case will be examined by a
screening committee with help of management and decide whether
to accept or reject a nominated project. When a business case is
accepted, the proposed project is forwarded for ranking and
selection. When additional information is received on such
proposed project, the case study may be revised based on the data
and appropriate decision would be taken on the final selection.

PE

22

Approval and Selection of Proposed Project

(c

)U

Based on the priority and rankings revealed by the expert


committee, the management may then authenticate the final
selection of project to take off. However, despite its selection, it
may not deem to be active project until resources are approved
and deployed for initiating. Therefore, it is vital to know that
unless resources are assigned from the Skills Inventory, having
due impact on the resource availability the project initiation may
not get finalised. For example, if A, B, and C are the machines
identified to be replaced by a textile unit for P, Q, and R. Unless
and until all the three are in place within the time frame finally, it
cannot be assumed that the total replacement project has been
initiated by the corresponding textile unit.

Rank Nominated Projects


When requested, all nominated projects that are in the databank
should be objectively ranked in order of significance. The ranking
criteria should include:
Target due dates
Impact on the total business
Impact on the technology architecture
Impact on other applications

UNIT 2: Project Identification & Selection

Project size, cost and duration

23

Evaluate Resources

Determine Resource Needs

)U

By evaluating the skills inventory and the candidate project


repository, this process will identify anticipated requirements for
quantities and capabilities of future resources. This information
will provide:
The identification of critical training needs
A basis for employment opportunities
Criteria for contract personnel

This process should be reviewed on a regular basis by Resource


Managers within the organization and can be used for staff career
counselling.

Check Your Progress

True or False:

The purpose of project initiation is to begin to define


the overall parameters of a project and establish the
appropriate
project
management
and
quality
environment required to complete the project.

(c
2.

___________________
___________________
___________________
___________________
___________________

An updated skills inventory should be maintained for all corporate


resources that are available for project assignment. Additionally,
an inventory of available contract resources should also be
captured. The purpose of this skills inventory is to understand the
true capabilities and capacities of these resources.

1.

___________________

PE

Firstly, rank the projects against each of these criteria separately


and then, compile a single ranking that weighs each of these
criteria against each other. This ranking process is typically used
to feed quarterly budget decisions but may be requested at any
time.

Notes

Project risk

The project manager works with the project sponsor to


identify the necessary resources and team members
needed to further develop the key project parameters
Cost, Scope, Schedule and Quality (CSSQ).

___________________
___________________
___________________
___________________

Project Management & Its Applications

___________________
___________________
___________________
___________________
___________________
___________________
___________________

A pre-feasibility study may be conducted first to help sort out


relevant scenarios. Before proceeding with a full-blown feasibility
study, you may want to do some pre-feasibility analysis of your
own. If you find out early, that the proposed business idea is not
feasible, it will save you time and money. If the findings lead you
to proceed with the feasibility study, your work may have resolved
some basic issues. A consultant may help you with the
pre-feasibility study, but you should be involved. This is an
opportunity for you to understand the issues of business
development.
The chief objectives of conducting pre-feasibility study are to
determine whether the project is promising or not and also
whether an investment decision can be taken on the basis of the
information furnished at the pre-feasibility stage. Moreover, it
analyses whether the information is adequate to decide that the
project idea is lucrative. Many project ideas gain life after such a
pre-feasibility analysis. By focusing on the special characteristic of
the project, a detailed study and a plan can be constructed through
which an appropriate resource base such as men, materials, time
and costs can be conveniently estimated.

(c

)U

___________________

Pre-feasibility Study

Notes
Activity
___________________
Collect
recent updates on
Pre-feasibility Study.
___________________

PE

24

Elements of Pre-feasibility Study


According to Clyfton and Fyffe, a pre-feasibility study may include
the following elements:

Project Description

The nature of the project output must be clearly described stating


all relevant advantages and disadvantages in comparison with all
competitive projects in the pipeline. Also, allied project offers may
be identified, which can be simultaneously developed with the
project under mock-up.

Description of Market

The present and potential market, with its competitive nature,


should be delineated. The description of the market should include
the following:
Outline of Technological Variants: Various choices of
techniques that are available for constructing and developing

UNIT 2: Project Identification & Selection

Notes

___________________
___________________
___________________
___________________
___________________

PE

Availability of Main Production Factors: The availability


of essential production factors such as raw materials, water,
power, fuel and labour should be examined thoroughly and
compared with available alternatives.

25

the project should be examined. Also, some vital factors vis-vis plant location must be clearly identified such as Labour
(quantity, special skills); Proximity to markets and raw
materials (distance in km); Transportation facilities and costs
(Roads, Railways, Docks and Airways), Water (quantity,
quality, restriction); Miscellaneous issues (personal preference,
competition, tax considerations, environmental controls, etc.)

___________________
___________________
___________________

Cost Estimates

___________________

Realistic estimates should be made of all cost factors so as to


reflect on all relevant investments and operational costs of the
project including contingencies.

Profitability Estimation

)U

The collected information should enable comparison between all


competing projects that are in the pipeline. The information should
also help prepare under various estimated profitability statements.

Miscellaneous

In addition to the above, some more factors may be considered


especially for new projects. These are:
General opinion and support of society towards the project or
the type of proposal.
Educational, recreational, and civic-amenities available in the
region.
Availability of any other alternative sites in the region.
Table 2.1: Focus of Pre-feasibility Studies
Consumer-oriented
Projects
(industrial)

Society/Economic-oriented
(defence, infrastructure
and others)

Competition and
survival
Demands and
preferences quality
New inventions or
innovation quality

Economic growth and


development
Standard of living of the society
Economic sufficiency
Regional disparities
Global competition

(c

Focus

Object

Contd...

___________________

Project Management & Its Applications

Notes
Activity
___________________
Write
an essay on Feasibility
Studies.
___________________

Scope of
Marketability

Existing demand vs.


existing supply
Gap analysis
Consumer behaviour
towards innovations

___________________

Check Your Progress

___________________

___________________

Fill in the blanks:


1.

___________________
___________________
___________________
___________________

2.

PE

___________________

Existing facilities vs. required


facilities
Present growth rate vs.
determined growth rate
Social behaviour (taboos,
customs) vs. the proposed project

26

Various choices of that are available for


constructing and developing the project should be
examined.
should be made of all cost factors so as
to reflect on all relevant investment and operational
costs of the project including contingencies.

Importance of Feasibility Studies

(c

)U

Feasibility analysis is the first stage in the process of project


development. A feasibility study looks at the viability of an idea
with an emphasis on identifying potential problems and attempts
to answer one main question: Will the idea work and should you
proceed with it?
The purpose of the analysis is to examine the desirability of
investing in pre-investment studies. For this purpose, it is
essential to examine project idea in the light of the available
internal (inputs, resources & outputs) and external constraints
(environment).
When a project idea is taken up for development, three situations
can arise:
the project may appear to be feasible,
project may turn out to be not feasible; or
the available data may not be adequate for arriving at
reasonable decision regarding further investment.

In the last mentioned case, investment in pre-investment studies


will obviously have to be deferred till such times adequate date
regarding the project feasibility is available. The project
sponsoring body will, therefore, have to invest in collection of
additional data and refer the investment decision for the timebeing. In the second situation, when the project is found to be not

UNIT 2: Project Identification & Selection

Nature or Project Feasibility Analysis

27
Notes

feasible, further investment in the project idea is completely ruledout. In the third situation, when the project idea is found to be
feasible, the decision-makers can proceed to invest further
resources in pre-investment studies and design development.

___________________
___________________
___________________
___________________
___________________

PE

In the broadest sense, every rational decision to make new


investment is preceded by an investigation of the feasibility of the
project, whether or not carried out in a formal manner. The larger
the project and greater the investment, the more formalized the
investigation. Assurance is needed in following matters:

___________________
___________________

that the market exists or can be developed,

___________________

that raw materials can be obtained,

___________________

that sufficient labour supply is available,

that local services vital to the project are at hand, and

that the overall costs for plant equipment, labour and raw
material input will be of a certain order.

)U

Most importantly, it must be determined that income will exceed


costs by a margin sufficient to make the project financially
attractive. When the project is small, the study format may be
quite informal; perhaps, there will be no formal study at all and
little accumulation of actual data. Nevertheless, the feasibility
calculations will have to be computed and evaluated, even if an
informal manner before the ultimate step of actual investment is
taken.

Need for Feasibility Studies

(c

A company is incorporated for the purpose of setting up a project.


The promoters obviously have to start with some broad idea about
the proposed industrial activity. They make mental picture as to
how the idea, when translated into reality would result in a
profitable project, given the demand-supply pattern, probable cost
of production, etc. It is quite likely that the originators get
attracted by the favourable aspects of the project known to them. It
is possible that they may have overlooked the dark side of the
picture, which can only be revealed by a detailed objective study.
Too many projects have floundered, at considerable loss to the
investors and indeed to the national economy through waste of

___________________

Project Management & Its Applications

___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________

scarce resources, because the investment decisions were taken


without objective and in-depth techno-economic feasibility studies.

Notes

In modern times, business operations are complex, requiring


carefully prepared plans. The shareholders, creditors, term
leaders, etc. insist on completing the analysis of the scheme.
Without their co-operation, it would not be possible to translate the
idea into action. This feasibility study helps the promoter to make
the investment decisions correctly and to obtain funds without
many difficulties.

PE

28

Complements of Feasibility Study

Project feasibility study comprises of market analysis, technical


analysis, financial analysis and social profitability analysis. The
analysis is mainly interested only in the commercial profitability
and thus, examining only the market, technical and financial
aspects of the project. But, generally the gamut of feasibility of a
project covers the following areas:
Commercial and economic feasibility

(c

)U

Technical feasibility
Financial feasibility

Managerial feasibility
Social feasibility or acceptability

These areas are briefly described below:

Commercial and Economic Feasibility


The economic feasibility aspect of a project relates to the earning
capacity of the project. Earnings of the project depend on the
volume of sales. Here, the following important indicators are taken
into consideration:
Present demand of the goods produced through the project, i.e.
market facility (or) getting a feel of the market.
Future demand: A projection may be made about the future
demand. The period normally depends upon the scale of
investment.
Determining the extent of supply to meet the expected demand
and arriving at the gap.

UNIT 2: Project Identification & Selection

Anticipated rate of return on investment. If it is positive, the


project justifies the economic norm in the relationship between
cost and demand.

Notes

___________________
___________________
___________________
___________________
___________________

PE

Future demand can be estimated after taking into consideration


the potentialities of the export market, the charges in the income
and prices, the multiple uses of the product, the probable
expansion of industries and the growth of new industries. The
market share of the proposed project could be identified by
considering the factors affecting the supply position such as
competitive position of the unit, existing and potential competitors,
the extent of capacity utilization, unit cost advantages and
disadvantages, structural changes and technological innovations
bringing substitute into the market.

29

Deciding in what way the project under consideration will


have a reasonable chance to share the market.

The commercial feasibility of a project involves a study of the


proposed arrangements for the purchase of raw materials and sale
of finished products. This study comprises the following two
aspects:

)U

Arriving at the physical requirement of production inputs such


as raw materials, power, labour, etc. at various levels of output
and converting them into cost. In other words, deciding costing
pattern.

Matching costs with revenues with a view to estimating the


profitability of the project and the break-even point. The
possibility ultimately decides whether the project will be a
feasible proposition or not.
The technical analysis of a project feasibility study serves to
establish whether or not the project is technically feasible and it
also provides a basis for cost estimating.

(c

Technical Feasibility

The examination of this aspect requires a thorough assessment of


the various requirements of the actual production process and
includes a detailed estimate of the goods and services needed for
the project. So, the feasibility report should give a description of
the project in terms of technology to be used, requirement of
equipment, labour and other inputs. Location of the project should
be given special attention in relevance to technical feasibility.

___________________
___________________
___________________
___________________
___________________

Project Management & Its Applications

___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________

The promoter of the project can approach the problem of


preparation of technical feasibility studies in the following order:
Undertaking a preliminary study of technical requirements to
have a quick evaluation.

If preliminary investigation indicate favourable prospects


working out further details of the project. The exercise begins
with engineering and technical specifications and covers the
requirements of the proposed project as to quality, quantity
and specification type of components of plant & machinery,
accessories, raw materials, labour fuel, power, water, effluent
disposal, transportation, etc.
Thus, the technical feasibility analysis is an attempt to study the
project basically from a technicians angle. The main aspects to be
considered under this study are: technology of the project, size of
the plant, location of the project, pollution caused by the project,
production capacity of the project, strength of the project,
emergency or stand-by facilities required by the project
sophistication such as automation, mechanical handling, required
collaboration agreements, production inputs and implementation
of the project.

(c

)U

___________________

Another important feature of technical feasibility relates the types


of technology to be adopted for the project. The exercise of technical
feasibility is not done in isolation. The scheme has also to be
viewed from economic considerations; otherwise, it may not be a
practical proportion, however sound, technically it may be.

Notes

PE

30

Financial Feasibility

The main objectives of this feasibility study are to assess the


financial viability of the project. Here, the main emphasis is on the
preparation of financial statement, so that the project can be
evaluated in terms of various measures of commercial profitability
and the magnitude of financing required can be determined. The
decision about the financial feasibility of project should be arrived
at based on the following consideration:
For existing companies, audited financial statements such as
balance sheets, income statements and cash flow statements.
For projects that involve new companies, statement of total
projects cost, initial capital requirements, and flow relative to
the projective time table.

UNIT 2: Project Identification & Selection

Supporting schedule for financial projections stating


assumptions used as to collection period of sales, inventory
levels, payment period of purchases and expenses and
elements of production cost, selling administrative and
financial expenses.

31
Notes

Financial projections for future time periods, including income


statements, cash flows and balance sheets.

___________________
___________________
___________________
___________________
___________________

If necessary sensibility analysis to identify items that have a


large impact on profitability or possibly a risk analysis.

___________________

A project should earn sufficient return on the investment. The very


idea of promoting a project by an entrepreneur is to earn attractive
returns on investment on the project.

___________________

Managerial Feasibility

PE

Financial analysis showing return on investment return on


equity, break-even volume and price analysis.

)U

The success or failure of a project largely depends upon the ability


of the project holder to manager of the project. Project is a bundle
of activities and each activity has its own role. For the success of a
project, a project holder has to co-ordinate all the activities in such
a way that the additive impact of different inputs can produce the
desired results. The ability to manage and organize all such interrelated activities comes within the concept of management. There
are some ways to measure the managerial efficiency:
Skill acquired through training
Skill acquired course of work

Social Feasibility

(c

A project may cross all the above barriers mentioned above and be
found very suitable but it will lose its entire creditability, if it has
no social acceptance. Though the social customs, conventions such
as caste, community, regional influence, etc. are creating
hindrance for development of a project, it should avoid all such
social conflicts which will stand on the successful implementation
of the project. For example, considering the interests of the general
public; projects which offer large employment potential, which
channelise the income from less developed areas will stimulate
small industries.

___________________

___________________

___________________

Project Management & Its Applications

Notes
Activity
___________________
Present
drafts of written
assignments on Project break___________________
even
point and then revise the
drafts which are based on
___________________
other
students comments.
Groups for this activity should
not ___________________
be too large.

In a nut shell, the feasibility report should highlight on these five


testing stones before it can be declared as complete. And, after
judging through these indicators a project can be declared as viable
and can be submitted for finance or any other assistance from
institutions.

Check Your Progress


True or False:

___________________

1.

___________________

___________________

Feasibility analysis is the first stage in the process of


project development.
The purpose of the analysis is to examine the
desirability of investing in pre-investment studies.

Project Break-even Point

Break-even is a financial term to describe a business or project


where the sales revenue is equal to total expenses. It is simple to
calculate if the expenses incurred are fixed, i.e. it does not change
as the revenue changes. The expenses usually constitute a fixed
component and variable component. The existence of variable
expenses complicates the calculation of break-even point. This is
because the variable cost will increase as the number of units sold
increases. The answer can be calculated by working out the total
gross profit of the unit sold to be equal to the total fixed expenses.

(c

)U

___________________

2.

PE

___________________

___________________

32

In simple words, break-even analysis provides insight into whether


or not revenue from a product or service has the ability to cover the
relevant costs of production of that product or service. Managers
can use this information in making a wide range of business
decisions, including setting prices, preparing competitive bids, and
applying for loans. Break-even analysis is a simple tool that
defines the minimum quantity of sales that will cover both variable
and fixed costs. Such analysis gives managers a quantity to
compare to the forecast of demand. If the break-even point lies
above anticipated demand, implying a loss on the product, the
manager can use this information to make a variety of decisions.
The product may be discontinued or, by contrast, may receive
additional advertising and/or be re-priced to enhance demand. One
of the most effective uses of break-even analysis lies in the
recognition of the relevant fixed and variable costs. The more
flexible the equipment and personnel, the lower the fixed costs,
and the lower the break-even point.

UNIT 2: Project Identification & Selection

Fill in the blanks:

2.

___________________

is a financial term to describe a business


or project where the sales revenue is equal to total
expenses.
If the break-even point lies anticipated
demand, implying a loss on the product, the manager
can use this information to make a variety of decisions.

Summary

)U

The process of identifying an idea for developing into a project is


called project identification. When examining projects for approval,
it is vital to examine the resource capacities and capabilities
available for assignment. The purpose of project initiation is to
define the overall parameters of a project and establish the
appropriate project management and quality environment required
to complete the project. Development of the project charter is a
pivotal starting point for the project, establishing the project
definition that will serve as the foundation for all future efforts.

The business case will be examined by a screening body with the


corporate authority to accept or reject a candidates project. The
chief objectives of conducting pre-feasibility study are to determine
whether the project is promising or not and whether an investment
decision can be taken on the basis of the information furnished at
the pre-feasibility stage. Project feasibility study comprises of
market analysis, technical analysis, financial analysis, and social
profitability analysis. Break-even is a financial term to describe a
business or project where the sales revenue is equal to total
expenses.

Lesson End Activity

Prepare the feasibility studies of your project and also discuss the
nature of project feasibility analysis.

(c

Notes

___________________
___________________
___________________
___________________

PE

1.

33

Check Your Progress

Keywords

Business Case: The information necessary to enable approval,


authorization and policy making bodies to assess a project proposal
and reach a reasoned decision.

___________________
___________________
___________________
___________________
___________________

Project Management & Its Applications

___________________
___________________
___________________
___________________
___________________
___________________
___________________

Commercial Feasibility: A study of the proposed arrangements


for the purchase of raw materials and sale of finished products, etc.

Notes

Feasibility Analysis: The first stage in the process of project


development.
Project Identification: A repeatable process for documenting,
validating, ranking and approving candidate projects within an
organization.

PE

34

Project Initiation: To define the overall parameters of a project


and establish the appropriate project management and quality
environment required to complete the project

___________________

Questions for Discussion

___________________

1.

Define project identification and discuss steps in project


identification.

2.

Explain the importance of project identification.

3.

What do you mean by term project initiation?

4.

Describe the need for feasibility studies.

5.

Explain the complements of feasibility study.

6.

Write a short note on:

(c

)U

___________________

(a) Commercial and economic feasibility


(b) Technical feasibility
(c) Financial feasibility
(d) Managerial feasibility
(e) Social feasibility or acceptability.

7.

Discuss the project break-even points.

Further Readings
Books

Clements/Gido, Effective Project Management, Thomson.


Clifford F. Gray and Erik W. Larson, Project Management, Tata
McGraw Hill.
Dennis Lock, Project Management, Ninth Edition, Gower.

UNIT 2: Project Identification & Selection

Prasanna Chandra, Projects-Planning, Selection, Financing,


Implementation and Review, Sixth Edition, Tata McGraw Hill.
P.C.K. Rao, Project Management and Control, Sultan Chand &
Sons.

Web Readings

Notes

___________________
___________________
___________________
___________________
___________________

PE

Vasant Desai, Project Management, Second Revised Edition,


Himalaya Publishing House.

35

K. Nagarajan, Project Management, Third Edition, New Age


International.

___________________
___________________

http://castle.eiu.edu/a_illia/mis4200/notes/MIS4200Notes4_1.pdf

___________________

http://www.scribd.com/doc/25275840/Project-Identification-andSelection-1

___________________

http://www.law.cornell.edu/cfr/text/44/206.435

http://class-summary.blogspot.in/2009/04/class-39-projectidentificationselectio.html

(c

)U

http://www.bbwarm.whatcomcounty.org/programs/cip/cipprocess

___________________

Project Management & Its Applications

36

Notes
___________________
___________________
___________________

___________________
___________________
___________________
___________________
___________________

(c

)U

___________________

PE

___________________

UNIT 3: Project Feasibility Study

Unit 3

37

___________________

Objectives

Feasibility Study

Advantages of Conducting Project Feasibility Study

Types of Feasibility

)U

A feasibility study is an evaluation and analysis of the potential of


the proposed project which is based on extensive investigation and
research to give full comfort to the decisions makers. Feasibility
studies aim to objectively and rationally uncover the strengths
and weaknesses of an existing business or proposed venture,
opportunities and threats as presented by the environment, the
resources required to carry through, and ultimately the prospects
for success. In its simplest terms, the two criteria to judge
feasibility are cost required and value to be attained. As such, a
well-designed feasibility study should provide a historical
background of the business or project, description of the product or
service, accounting statements, details of the operations
and management, marketing research and policies, financial data,
legal requirements and tax obligations. Generally, feasibility
studies precede technical development and project implementation.

Feasibility Study

As the name implies, a feasibility study is an analysis of the


viability of an idea. The term feasibility study is used as a
convenient description for the output for the work done; users of
this toolkit should not apply preconceived notions of what a
feasibility study consists of. The feasibility study focuses on
helping answer the essential question of should we proceed with
the proposed project idea? All activities of the study are directed
toward helping answer this question. Stated as simply as possible,
the work done here must show that the project:

(c

___________________
___________________

PE

After completion of this unit, the students will be aware of the following
topics:

Introduction

Project Feasibility Study

Notes
Activity
You___________________
and your group members
are required to develop and
write___________________
a feasibility study.

___________________
___________________
___________________
___________________
___________________

Project Management & Its Applications

is in accordance with predetermined needs;

is the most suitable technical solution to the needs;

can be implemented within any capacity constraints of the


Institution which operates;

has been subject to a due diligence that shows it is legally,


physically and socially compliant;

is fully cost over the whole life of the project;

has taken due cognisance of the risks associated with its whole
life cycle;

is affordable to the institution responsible for the project in the


context of the available budget.

___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________

An initial feasibility study is performed on system requests in


order to help determine the priority of the project and to determine
if it would be worthwhile to proceed.
In either case, the feasibility study is not intended to be a
comprehensive analysis. The feasibility study is intended to be a
preliminary review of the facts to see if it is worthy of proceeding
to the analysis phase. From the systems analyst perspective, the
feasibility analysis is the primary tool for recommending whether
to proceed to the next phase or to discontinue the project.

(c

)U

___________________

Notes

PE

38

Feasibility studies can be used in many ways but primarily focus


on proposed business ventures. Farmers and others with a
business idea should conduct a feasibility study to determine the
viability of their idea before proceeding with the development of
the business. Determining early on that a business idea will not
work saves time, money and heartache later.
A feasible business venture is one where the business will generate
adequate cash flow and profits, withstand the risks it will
encounter, remain viable in the long-term and meet the goals of
the founders. The venture can be a new start-up business, the
purchase of an existing business, an expansion of current business
operations or a new enterprise for an existing business.
Information file, a feasibility study outline is provided to give
guidance on how to proceed with the study and what to include.
Also, information file, how to use and when to do a feasibility study
helps through the process and also to get the most out of the study.
A feasibility study is only one step in the business idea assessment
and business development process. Reviewing this process and

UNIT 3: Project Feasibility Study

Notes

___________________
___________________
___________________
___________________
___________________

PE

A feasibility study is usually conducted after producers have


discussed a series of business ideas or scenarios. The feasibility
study helps to frame and flesh-out specific business
alternatives so they can be studied in-depth. During this process
the number of business alternatives under consideration is usually
quickly reduced. During the feasibility process you may investigate
a variety of ways of organizing the business and positioning your
product in the marketplace. It is like an exploratory journey and
you may take several paths before you reach your destination. Just
because the initial analysis is negative does not mean that the
proposal does not have merit if organized in a different fashion or
if there are market conditions that need to change for the idea to
be viable.

39

reading the information below will help put the role of the
feasibility study in perspective.

)U

Sometimes limitations or flaws in the proposal can be corrected. A


pre-feasibility study may be conducted first to help sort out
relevant alternatives. Before proceeding with a full-blown
feasibility study, you may want to do some pre-feasibility analysis
of your own. If you find out early on that the proposed business
idea is not feasible, it will save you time and money. However, if
the findings lead you to proceed with the feasibility study; your
work may have resolved some basic issues. A consultant may help
you with the pre-feasibility study, but you should be involved. This
is an opportunity for you to understand the issues of business
development.

(c

A market assessment may be conducted to help determine the


viability of a proposed product in the marketplace. The market
assessment will help you identify opportunities in a market or
market segment. If no opportunities are found, there may be no
reason to proceed with a feasibility study. If opportunities are
found, the market assessment can give focus and direction to the
construction of business alternatives to investigate in the
feasibility study. A market assessment will provide much of the
information for the marketing section of the feasibility study. The
conclusions of the feasibility study should outline in depth the
various alternatives examined and the implications and strengths
and weaknesses of each. The project leaders need to study the
feasibility study and challenge its underlying assumptions. This is
the time to be sceptical. Do not expect one alternative to jump off
the page as being the best one. Feasibility studies do not suddenly

___________________
___________________
___________________
___________________
___________________

Project Management & Its Applications

___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________

Major stumbling blocks may emerge that negate the project.


Sometimes these weaknesses can be overcome. Rarely does the
analysis come out overwhelmingly positive. The study will help you
assess the trade-off between the risks and rewards of moving
forward with the business project. Remember, it is not the purpose
of the feasibility study or the role of the consultant to decide
whether or not to proceed with a business idea; it is the role of the
project leaders. The go/no-go decision is one of the most critical in
business development. It is the point of no return. Once you have
definitely decided to pursue a business venture, there is usually no
turning back.

The feasibility study will be a major information source in making


this decision. This indicates the importance of a properly developed
feasibility study. A feasibility study is not a business plan. The
separate roles of the feasibility study and the business plan are
frequently misunderstood. The feasibility study provides an
investigating function. It addresses the question of Is this a viable
business venture? The business plan provides a planning function.
The business plan outlines the actions needed to take the proposal
from idea to reality.

(c

)U

___________________

become positive or negative. As you accumulate information and


investigate alternatives, neither a positive nor negative outcome
may emerge. The decision of whether to proceed often is not clearcut.

Notes

PE

40

The feasibility study outlines and analyses several alternatives or


methods of achieving business success. So, the feasibility study
helps to narrow the scope of the project to identify the best
business model. The business plan deals with only one alternative
or model. The feasibility study helps to narrow the scope of the
project to identify and define two or three scenarios or alternatives.
The consultant conducting the feasibility study may work with the
group to identify the best alternative for their situation. This
becomes the basis for the business plan.
The feasibility study is conducted before the business plan. A
business plan is prepared only after the business venture has been
deemed to be feasible. If a proposed business venture is considered
to be feasible, then a business plan constructed that provides a
roadmap of how the business will be created and developed. The
business plan provides the blueprint for project implementation.
If the venture is deemed not to be feasible, efforts may be made to

UNIT 3: Project Feasibility Study

41
Notes

correct its deficiencies, other alternatives may be explored, or the


idea is dropped. Project leaders may find themselves under
pressure to skip the feasibility analysis step and go directly to
building a business. Individuals from within and outside of the
project may push to skip this step. Reasons given for not doing
feasibility analysis include:

___________________
___________________
___________________
___________________

We know it is feasible. An existing business is already doing it.

Why do another feasibility study when one was done just a few
years ago?

___________________

Feasibility studies are just a way for consultants to make


money.

___________________

The feasibility analysis has already been done by the business


that is going to sell us the equipment.

___________________

PE

Why not just hire a general manager who can do the study?

Feasibility studies are a waste of time.

)U

We need to buy the building, tie up the site and bid on the
equipment. The reasons given above should not dissuade you from
conducting a meaningful and accurate feasibility study. Once
decisions have been made about proceeding with a proposed
business, they are often very difficult to change. You may need to
live with these decisions for a long time.

(c

From a financial perspective, project selection is basically a two


part process. First, the organization will conduct a feasibility study
to determine whether the project can be done. The second part is to
perform a benefit-to-cost analysis to see whether the company
should do it. The purpose of the feasibility study is to validate that
the project meets feasibility of cost, technological, safety,
marketability and ease of execution requirements. It is possible for
the company to use outside consultants or Subject Matter Experts
(SMEs) to assist in both feasibility studies and benefit-to-cost
analyses. A project manager may not be assigned until after the
feasibility study is completed.
As part of the feasibility process during project selection, senior
management often solicits input from Subject Matter Experts
(SMEs) and lower level managers through rating models. The
rating models normally identify the business and/or technical
criteria against which the ratings will be made. Once feasibility is
determined, a benefit-to-cost analysis is performed to validate that

___________________

___________________

___________________

Project Management & Its Applications

Notes
Activity
___________________
Research
the
business
problem or opportunity by
___________________
conducting
a project feasibility
study.
___________________

the project will, if executed correctly, provide the required financial


and non-financial benefits. Benefit-to-cost analyses require
significantly more information to be scrutinized than is usually
available during a feasibility study. This can be an expensive
proposition.

Check Your Progress

___________________

Fill in the blanks:

___________________

1.

___________________

___________________
___________________

2.

PE

___________________

___________________

42

A study is an analysis of the viability of


an idea.

The feasibility study helps to and


flesh-out specific business alternatives so they can be
studied in-depth.

Advantages of Conducting Project Feasibility Study

(c

)U

Feasibility studies are useful tools for testing ideas on paper before
deciding whether to implement them. If a small business is
considering a significant change in its operation such as
marketing a new product, acquiring another business or installing
a new telecommunications system the owner or management
team can evaluate the idea before committing time and money to
it. Conducting a feasibility study is a rigorous process that can
yield valuable information about an organization and its future. If
a feasibility study indicates that an idea has good potential, the
company can proceed with the business planning of how and when
to develop and implement the idea.

Current Situation

The first step in a feasibility study is to conduct a thorough


evaluation of the current situation at the company. For example, if
the idea concerns moving to a larger, more modern manufacturing
facility, management should understand the strengths and
weaknesses of the current location. The move might not be
justified in terms of increased efficiency and productivity. This
early stage is also the time to determine how many in the
management team are in favour of the idea.

The Idea
Feasibility studies force a serious analysis of the idea and perhaps
a first look at aspects of it that might be troubling to the company.

UNIT 3: Project Feasibility Study

43
Notes

For example, manufacturing a certain product might require


devoting a great deal of time and resources to regulatory
compliance something that could lessen the profitability of the new
product. This might raise the question of whether the new product
would be worth the trouble.

___________________
___________________
___________________

The Competition

___________________

The Impact

)U

The management team should give serious consideration to the


possible impact of the idea on various parts of the company. For
example, if the company is considering acquiring another business
or part of another company, there would be multiple disruptions to
current operations. Areas to be evaluated would include banking
and finance, human resources, operations and management. The
current management should also consider other plans that might
be in place and the impact of the new idea on them.

Tangible and Intangible Benefits

Estimating benefits and costs in a timely manner is very difficult.


Benefits are often defined as:
z

Tangible benefits for which dollars may be reasonably


quantified and measured.

Intangible benefits that may be quantified in units other than


dollars or may be identified and described subjectively.

(c

___________________

PE

During the process of deciding whether to commit to a new


business idea, it's natural for a company to consider how a change
would affect its competitive situation. If a retail store has
outgrown its current space, the owner should be seeking a larger
space that is the same or better in terms of convenience for
customers, availability of parking and general desirability. The
outcome shouldn't be more space but fewer customers. If
acceptable new space isn't available, the owner could direct his
attention to the feasibility of gaining space by renovating the
current location.

Costs are significantly more difficult to quantify, at least in a


timely and inexpensive manner. The minimum costs that must be
determined are those that specifically are used for comparison to
the benefits. These include:

___________________
___________________
___________________
___________________
___________________

Project Management & Its Applications

___________________
___________________
___________________
___________________
___________________
___________________

The current operating costs or the cost of operating in today's


circumstances.

Future period costs that are expected and can be planned for.

Intangible costs that may be difficult to quantify. These costs


are often omitted if quantification would contribute little to the
decision-making process.

Notes
Activity
___________________
What
kind of final clearances
and
from
whom,
the
___________________
entrepreneurs
are required to
take as soon as the unit goes
into___________________
production?

There must be careful documentation of all known constraints and


assumptions that were made in developing the costs and the
benefits. Unrealistic or unrecognized assumptions are often the
cause of unrealistic benefits. The go or no-go decision to continue
with a project could very well rest upon the validity of the
assumptions.

PE

44

Check Your Progress

___________________

Fill in the blanks:


1.

Estimating benefits and costs in a timely manner is


very .

(c

)U

2.

The should give serious consideration


to the possible impact of the idea on various parts of the
company.

Types of Feasibility
Feasibility is of the following types:

Technical Feasibility

This area reviews the engineering feasibility of the project,


including structural, civil and other relevant engineering aspects
necessitated by the project design. The technical capabilities of the
personnel as well as the capability of the projected technologies to
be used in the project are considered. In some instances,
particularly when projects are in third world countries, technology
transfer between geographical areas and cultures needs to be
analysed to understand productivity loss (or gain) and other
implications due to differences in topography, geography, fuels
availability, infrastructure support and other issues.

Managerial Feasibility
Demonstrated management capability and availability, employee
involvement, and commitment are key elements required to

UNIT 3: Project Feasibility Study

Economic Feasibility

___________________
___________________

___________________
___________________

PE

)U

Financial feasibility should be distinguished from economic


feasibility. Financial feasibility involves the capability of the
project organization to raise the appropriate funds needed to
implement the proposed project. In many instances, project
proponents choose to have additional investors or other sources of
funds for their projects. In these cases, the feasibility, soundness,
sources and applications of these project funds can be an obstacle.
As appropriate, loan availability, credit worthiness, equity, and
loan schedule still be reviewed as aspects of financial feasibility
analysis. Also included in this area are the review of implications
of land purchases, leases and other estates in land.

Cultural Feasibility

Cultural feasibility deals with the compatibility of the proposed


project with the cultural environment of the project. In labourintensive projects, planned functions must be integrated with the
local cultural practices and beliefs. For example, religious beliefs
may influence what an individual is willing to do or not do.

(c

Notes

___________________

This involves the feasibility of the proposed project to generate


economic benefits. A benefit-cost analysis (addressing a problem or
need in the manner proposed by the project compared to other, the
cost of other approaches to the same or similar problem) is
required. A breakeven analysis when appropriate is also a required
aspect of evaluating the economic feasibility of a project. (This
addresses fixed and variable costs, and utilization/sales forecasts).
The tangible and intangible aspects of a project should be
translated into economic terms to facilitate a consistent basis for
evaluation. Even when a project is non-profit in nature, economic
feasibility is critical. 71

Financial Feasibility

45

ascertain managerial feasibility. This addresses the management


and organizational structure of the project, ensuring that the
proponents structure is as described in the submittal and is well
suited to the type of operation undertaken.

Social Feasibility

Social feasibility addresses the influences that a proposed project


may have on the social system in the project environment.

___________________
___________________
___________________
___________________
___________________

Project Management & Its Applications

Notes
___________________
___________________
___________________

The ambient social structure may be such that certain categories of


workers may be in short supply or non-existent. The effect of the
project on the social status of the project participants must be
assessed to ensure compatibility. It should be recognized that
workers in certain industries may have certain status symbols
within the society.

___________________

___________________
___________________
___________________
___________________
___________________

Safety Feasibility

PE

___________________

46

Safety feasibility is another important aspect that should be


considered in project planning. Safety feasibility refers to an
analysis of whether the project is capable of being implemented
and operated safely with minimal adverse effects on the
environment. Unfortunately, environmental impact assessment is
often not adequately addressed in complex projects.

Political Feasibility

(c

)U

Political considerations often dictate directions for a proposed


project. This is particularly true for large projects with significant
visibility that may have significant government inputs and
political implications. For example, political necessity may be a
source of support for a project regardless of the project's merits. On
the other hand, worthy projects may face insurmountable
opposition simply because of political factors. Political feasibility
analysis requires an evaluation of the compatibility of project goals
with the prevailing goals of the political system.

Environmental Feasibility
Often environmental clearance from government and civil society
may prove to be a killer of projects through long, drawn-out
approval processes and outright active opposition by those
claiming environmental concerns. This is an aspect worthy of real
attention in the very early stages of a project. Concern must be
shown and action must be taken to address any and all
environmental concerns raised or anticipated. This component also
addresses the ability of the project to timely obtain and at a
reasonable cost, needed permits, licenses and approvals.

Market Feasibility
This area should not be confused with the economic feasibility.
The market needs analysis to view the potential impacts of market
demand, competitive activities, etc. and market share available.

UNIT 3: Project Feasibility Study

Check Your Progress


Fill in the blanks:

2.

Notes

___________________
___________________
___________________
___________________

The capabilities of the personnel as well


as the capability of the projected technologies to be used
in the project are considered.

___________________

PE

1.

47

Possible competitive activities by competitors, whether local,


regional, national or international, must also be analysed for early
contingency funding and impacts on operating costs during the
start-up, ramp-up, and commercial start-up phases of the project.

A analysis when appropriate is also a


required aspect of evaluating the economic feasibility of
a project.

___________________
___________________
___________________
___________________
___________________

Summary

)U

The term feasibility study is used as a convenient description for


the output for the work done; users of this toolkit should not apply
preconceived notions of what a feasibility study consists of.
Feasibility studies can be used in many ways but primarily focus
on proposed business ventures. A feasibility study is usually
conducted after producers have discussed a series of business ideas
or scenarios. The feasibility study helps to frame and flesh-out
specific business alternatives so they can be studied in-depth.
A feasibility study is not a business plan. The separate roles of the
feasibility study and the business plan are frequently
misunderstood. Feasibility studies are useful tools for testing ideas
on paper before deciding whether to implement them.

Lesson End Activity

Critically examine the guidelines for the Feasibility Study.

(c

Keywords

Technical Feasibility: This area reviews the engineering


feasibility of the project, including structural, civil and other
relevant engineering aspects necessitated by the project design.
Economic Feasibility: This involves the feasibility of the
proposed project to generate economic benefits.

Project Management & Its Applications

___________________
___________________
___________________
___________________
___________________
___________________
___________________

Financial Feasibility: It involves the capability of the project


organization to raise the appropriate funds needed to implement
the proposed project.

Notes

Cultural Feasibility: It deals with the compatibility of the


proposed project with the cultural environment of the project.

Social Feasibility: It addresses the influences that a proposed


project may have on the social system in the project environment.

PE

48

Safety Feasibility: It refers to an analysis of whether the project


is capable of being implemented and operated safely with minimal
adverse effects on the environment.

___________________

Questions for Discussion

___________________

1.

The feasibility study is not intended to be a comprehensive


analysis. Elucidate.

2.

What are the important facets of a project feasibility study?

3.

Do you think that feasibility study is conducted before the


business plan? If yes, give reasons.

4.

Highlight the reasons for not doing feasibility analysis.

5.

What are the tangible and intangible benefits of feasibility


study?

6.

Compare and contrast the economic and financial feasibility.

(c

)U

___________________

Further Readings
Books

Clements/Gido, Effective Project Management, Thomson.


Clifford F. Gray and Erik W. Larson, Project Management, Tata
McGraw Hill.
Dennis Lock, Project Management, Ninth Edition, Gower.

K. Nagarajan, Project Management, Third Edition, New Age


International.
Prasanna Chandra, Projects-Planning, Selection, Financing,
Implementation and Review, Sixth Edition, Tata McGraw Hill.
P.C.K. Rao, Project Management and Control, Sultan Chand &
Sons.

UNIT 3: Project Feasibility Study

49
Notes

Vasant Desai, Project Management, Second Revised Edition,


Himalaya Publishing House.

___________________

Web Readings
http://www.du.ac.in/fileadmin/DU/Academics/course_material/EP_
05.pdf

___________________
___________________
___________________

PE

https://www.extension.iastate.edu/agdm/wholefarm/html/c565.html

___________________

http://www.dwp.gov.uk/docs/credit-union-feasibility-studyreport.pdf

___________________

http://www.method123.com/feasibility-study.php

___________________

http://nfsmi.org/documentlibraryfiles/PDF/20080212032917.pdf

___________________

___________________

(c

)U

___________________

Project Management & Its Applications

50

Notes
___________________
___________________
___________________

___________________
___________________
___________________
___________________
___________________

(c

)U

___________________

PE

___________________

UNIT 4: Project Feasibility Econometric Model

Unit 4

51

After completion of this unit, the students will be aware of the following
topics:
\

Capital Costs

Working Capital

Operating Costs

Product Revenues

The Econometric Model

Modifying the Variables

Introduction

)U

The factors affecting the feasibility and the potential profitability


of a new project are of concern to marketers, developers and
investors. Complex econometric models, which analyse these
variables, have been developed to run on large computers.
(Econometrics is the use of mathematical and statistical methods
to develop and verify economic theories). Econometric model that
can be developed on a PC is described here. In developing a PC
econometric model, six factors must be considered.

Capital Costs

The capital cost of a new project can usually be determined with


reasonable accuracy (say within 15%). Capital cost is an extremely
important number for two reasons: first, it is required "up-front".
The money has to be found and spent many years before there is a
payout. Second, the overall profitability of a project is usually
measured in terms of Return on Investment (ROI).

(c

Objectives

(a) ___________________
yearly basis
(b) over life period of the
___________________
project
___________________

PE

Project Feasibility Econometric


Model

Notes
Activity
___________________
Establish
revenues from the
product sales of your project
on: ___________________

Many operating concerns and investors set their goals on ROI (say,
a minimum of 20% per annum pre-tax). The average annual ROI is
the total earnings divided by the specified project life times the
total investment. A 10% increase in capital cost will cause a
corresponding 10% decrease in ROI for a project with a 10-year life

___________________
___________________
___________________
___________________
___________________

Project Management & Its Applications

___________________
___________________

cycle. A 20% ROI on a project with a 10-year life means that the
project will earn 20% for 10 years, which is 200% on the life of the
project or 100% over 5 years. This is equivalent to a pay out period
of 5 years.
Table 4.1: Major Factors Affecting Project Profitability

___________________
___________________

S. No.

___________________
___________________

Notes

Factor

Probable Accuracy
of Estimate
Prediction

Possible Effect
on Project
Profitability

PE

52

1.

Land & Site costs

Good

Minor

2.

Engineering costs

Good

Minor

___________________

3.

Equipment & Material costs

Good

Major

___________________

4.

Construction Cost

Fair

Major

5.

Initial Start Up Costs

Fair

Intermediate

6.

Construction Duration

Good

Minor

___________________

7.

Working Capital

Fair

Major

8.

Operating Costs

Fair

Major

9.

Plant Labour Rates

Poor

Major

10.

Cost of Feedstocks

Poor

Major

11.

Cost of Utilities

Fair

Major

12.

Product Sale Volume

Poor

Major

13.

Product Sale Price

Poor

Major

14.

Residual Plant Value

Poor

Minor

15.

Taxation Rates

Poor

Major

16.

Rates of Inflation

Poor

Major

17.

Interest Rates

Fair

Major

18.

Currency Exchange Rates

Poor

Major

19.

General Economic Climate

Poor

Intermediate

20.

Government Influences

Poor

Major

(c

)U

___________________

The need to maintain a high ROI to attract investors explains why


there is so much pressure to keep the initial capital investment to
a minimum. Frequently, desirable options and expansions are
deferred. Features that will improve yields or increase efficiency
are carefully examined if they add to the cost.
Table 4.2 is the checklist of items that make the capital cost of a
new project. Major items that make up the capital cost are:
(1) Land and site development costs, (2) Engineering, procurement
and construction costs and (3) Start-up (commissioning) costs. The
land or the site costs should be noted separately since they will
have residual value after the end of the project life. For all projects
there should be a substantial sum set aside for start-up (say 15 to
20%). This sum may need to be higher for new unproven projects

UNIT 4: Project Feasibility Econometric Model

Table 4.2: General Checklist of Items in the Capital Cost Estimates


S.
No.

Major
Classification

Detail Items

Site

Property cost, Fees, Surveys, Clearing and grading,


Roads, Railways, Fences, Paved areas, Landscaping

2.

Buildings,
Foundations and
Structures

Process, Auxiliary and administration buildings,


Process structures, Pipe racks, Platforms, Ladders,
Maintenance/Handling facilities and foundations

3.

Building Services

Plumbing, HVAC, Fire protection, Lighting, Alarms


and communication

4.

Process
Equipment

An itemized process equipment list from checked


process flow sheets.

5.

Non-Process
Equipment

Fire fighting, Maintenance, Storage and other mobile


equipment, Furniture, Lockers, Tools, Office, Lab
and housekeeping equipment

6.

Process
Auxiliaries

Process piping and supports, Instrumentation,


Insulation, Cabling, Switchgear, Earthing and
Controls

7.

Utilities

Steam plant, Power generation and supply, Air


Plant, Refrigeration, Water treatment and supply,
Effluent treatment and outfall, Sewage and drains,
Inert gas supply

8.

Offsite Facilities

Distribution pipelines for steam, Condensate, Water,


Air, Fuel, Electrical cabling, Feedstock and finished
product handling and storage, Tanks, Spheres, Silos,
Railway and truck loading facilities, Blow down and
flare systems

9.

Engineering Costs

Administration, Process, Project and design


engineering, Procurement expediting and inspection,
Reprography, Computers, Communications

10.

Construction
Costs

Construction labour, Supervision, Equipment, Tools,


Consumables, Testing

11.

Misc. Items

Catalysts and chemicals, Spare parts, Construction


spares, Surplus equipment, Taxes and insurance,
Duties, Start-up expenses, Management reserves,
Errors and omissions

Notes

___________________
___________________
___________________
___________________
___________________

)U

PE

1.

53

and could be less for established projects. A suitable contingency or


management reserve needs to be included in the capital cost
estimates.

(c

Check Your Progress

Fill in the blanks:


1.

The cost of a new project can usually


be determined with reasonable accuracy.

2.

The overall profitability of a project is usually


measured in terms of .

___________________
___________________
___________________
___________________
___________________

Project Management & Its Applications

Working Capital

Notes
Activity
1. ___________________
List out factors that could
affect the product revenues
___________________
and the probability of their
occurrence.
___________________
2. Establish profitability of
your project. What could
___________________
be reasons for lower
profitability?
___________________

Table 4.3 is a typical checklist of items that are considered working


capital. Working capital is also needed "upfront".
There must be enough capital available to build up inventories,
operate the plant and continue to pay debtors bills before
payments from clients and creditors are received.
Table 4.3: Working Capital Items and Periods

___________________

S. No.

___________________

1.

___________________
___________________
___________________

2.
3.
4.
5.
6.
7.
8.
9.

PE

54

Account

Feedstock Accounts Payable

Period Months
0-1

Feedstock Inventories

0.5 - 1

Staff & Labour Payroll

0.5 - 1

Utilities

1 to 2

Manufacturing Consumables

1 to 2

Product Inventories

1 to 3

Products Account Receivables

1 to 2

Taxes Payable

4 to 6

Freight Payable

0.5 - 1

(c

)U

A major component of working capital is the cost of maintaining


inventories of feed stocks, products and other consumables. Table
4.3 also shows typical inventory levels considered necessary.
Working capital although required "up-front", also has a residual
value at the end. Inventory can be sold off and cash value realized
on completion of the plant life.

Check Your Progress

Fill in the blanks:


1.

Working capital is also needed .

2.

can be sold off and cash value realized


on completion of the plant life.

Operating Costs

Table 4.4 lists the typical items that go into the make-up of
operational costs. These are costs which, in general, are
proportional to the plant throughput. They are necessary to run
the plant.
The major operating costs of a process plant are the costs of
feedstock, raw materials, utilities and other consumables. It is not
unusual for the annual cost of feedstock and utilities for a process

UNIT 4: Project Feasibility Econometric Model

S.
No.
1.

Major
Classification
Materials

Notes

___________________
___________________
___________________
___________________
___________________

PE

Table 4.4: Checklist of Items for Operating Cost Estimates

55

plant to exceed the capital cost by a significant factor. This is often


recognized by the fact that a major reason for considering a new
plant is the availability of feedstock, raw materials or a key utility
at an especially advantageous price. In many cases, the physical
location of the plant may be dictated by the location of available
feedstock or utility.

Detail Items

Feedstock materials, Processing chemicals and


catalysts, Utilities, Maintenance materials,
Operating supplies and consumables

2.

Labour

Plant labour and supervision, Maintenance


labour and supervision, Payroll, Additives

3.

Plant Overheads

Administration, Lab, Technical, Purchasing,


Inspection, Shipping, Personnel, Safety,
Accounting, Clerical, Shops and repair facilities,
Cafeteria, Communications, Taxes and duties

Marketing

Salesmen's salaries and commissions, Publicity,


Samples, Travel and entertainment, Market
research

5.

Distribution

Containers and packages, Transportation and


shipping, Terminals and warehouses

6.

General, Overheads
and Administration

General management and central technical,


Marketing and other activities, Legal and patent,
Research and development, Public relations

7.

Financial

Depreciation, Debt management, Maintenance of


working capital, Credit functions, Interest
payments

)U

4.

Normally, an investor or developer will want to make sure that


there is a guaranteed source of feedstock and supplies of key
utilities at fixed prices. Longtime contracts may be signed, in
advance, for the supply of feedstock and utilities. Such a move may
go a long way in reducing the major part of the risk in a new
project venture.

Check Your Progress

(c

Fill in the blanks:


1.

The major costs of a process plant are


the costs of feedstock, raw materials, utilities and other
consumables.

2.

contracts may be signed, in advance,


for the supply of feedstock and utilities.

___________________
___________________
___________________
___________________
___________________

Project Management & Its Applications

___________________
___________________
___________________
___________________
___________________

The key objective of the project is to earn revenue from the sale of
the products. For the project to be successful there must be a
secure market. The main features that marketers will attempt to
establish are (1) Is there a demand for the products and will this
continue or preferentially increase over the life of the project? and
(2) Will the price of the products remain stable or increase over the
life of the project?

The total profitability of the project is set by the margin between


the cost of production and the selling price of products. The selling
price must be competitive initially and as far as can be seen
remain competitive over the life of the project. The potential
markets should be identified and the ability of the buyers to pay
must also be evaluated. Many a project has failed because
although there was a need for the product, the buyers did not have
the capacity to pay. Most astute developers will attempt to
negotiate long-term "base load" sales contracts at preferential
prices. They will find a financially sound buyer who will take a
substantial portion of the product at a rate that is attractive and
guaranteed over a period of five or more years. This establishes a
base operating level and a base income for the project.

(c

)U

___________________

Product Revenues

Notes
Activity
List___________________
out economic factors
those could affect profitability
of ___________________
your project. Establish
their trend of changes based
on ___________________
the analysis of data of
recent previous years.
___________________

PE

56

The operating level is also a key to project success. Large plants


benefit from "economies of scale". A large throughput achieves
higher operating efficiencies and also allows many fixed or semifixed costs to be distributed over higher volumes of product
resulting in a lower unit cost. The theory of economy of scale is
admirable if there is demand for the volume of product produced.
Large plants can be big money losers if they are not run at full
capacity. In any feasibility study, the level of plant operation is a
major contributor to overall profitability.

Economic Factors

Economic factors, in general, cannot be predicted over a long


period. These include the rate of inflation, interest levels, foreign
currency exchange rates, and the general business climate.
Interest, inflation and foreign currency exchange rates can be built
up in the econometric model to see the effect on profitability.
Different high/low rates may be selected over the life of the project
to determine the best and worst that could happen. From this, the
profitability risk can be established. In some cases it may be

UNIT 4: Project Feasibility Econometric Model

Government Influences

Nothing can be done about future government influences. The best


that can be done is to pick up an area where the government seems
stable. Look carefully at the history and check out all pending
legislation. Select backward areas offering tax concessions over the
life of the project.

Check Your Progress


Fill in the blanks:

The key objective of the project is to earn


from the sale of the products.

2.

factors cannot be predicted over a long


period.

)U

1.

The Econometric Model

The first step in preparing an econometric model is to set up the


columns and rows required. In the example given here, the
operating life of the plant will be 10 years, with a three year
construction period. A column of values will be required for each
year. An initial design value and a final value are also needed. A
reference column and a description column complete the picture
resulting in 17 columns overall. These are labelled A through Q.
The rows under the columns now deal in sequence with the factors
already described to give the financial picture. Reference should be
made to the econometric model in Table 4.5. This model is an
example to illustrate method and technique. The actual values are
not necessarily in line with commercial practice.

(c

Notes
Activity
List ___________________
out factor those could
affect econometric model of
your___________________
project. Check out those
factors that have greatest
___________________
effect
on profitability of your
project.
___________________
___________________

PE

City, state and central governments can have a major impact on a


project. New taxes may be introduced or existing rates may be
changed. Regulations may be passed, particularly with regard to
environmental concerns that may require additional capital
expenditure and add to the operating cost. Tax incentives may be
made to competitors in another location.

57

possible to hedge against adverse conditions by buying forward or


by incorporating adjustments or escalation clauses in contracts.

Column Headings: Columns are identified with their headings


and year numbers.

___________________
___________________
___________________
___________________
___________________

Project Management & Its Applications

Row 1: Average Inflation Rate, per cent. This row shows the
predicted rate of annual inflation for the entire project life of
13 years.

Row 2: Compounded Escalation factor (CEF). Row 2 converts


row 1 into a compounded multiplier. CEF for year

___________________
___________________
___________________
___________________

N = (1+I1/100)x(1+I2/100) x(1+IN/2/100). For year N average


inflation rate is taken at midyear point, hence N/2.

___________________
___________________
___________________

General Factors

Notes

___________________
___________________

PE

58

Row 3: Plant Operating Rate, per cent (POR). The plant


operating rate is a key variable in the profitability study. A
60% operating rate is considered for year 1 rising to 100% over
the first five years.

___________________

Table 4.5: The Econometric Model

No.

Year No.

Design

10

11

12

13

Final

Year

Value

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

1013

Value

GENERAL FACTORS
1

Avg. Inflation Rate %

7.5

8.5

9.5

10

10.5

11

10.5

10

9.5

9.5

Compounded Escalation Factor

1.03

1.061

1.101

1.145

1.193

1.247

1.306

1.372

1.444

1.523

1.603

1.683

1.763

Plant Operating Rate %

100

60

70

80

90

100

100

100

100

100

100

Land Cost $M

20

20.6

Plant Cost $M

250

51.5

79.57 110.07

28.62

Working Capital $M

186.15

Total Capital Cost $M

456.15

72.1

1.847

(c

)U

CAPITAL COST

35.24
44

0 125.42

23.25

25.31

27.5

30.1

14.6

12.75

13.1

13.61

14.04

299.93

79.57 110.07 154.04

23.25

25.31

27.5

30.1

14.6

12.75

13.1

13.61

14.04

379.17

27.3

28.67

30.1

31.6

33.1

34.04

36.5

38.41

40.33

46.13

455 477.75 501.44 526.72 553.06 580.71 609.74 640.23 672.24 705.05

706.86

OPERATING COSTS

Feed Unit Cost $/BBL

Cost of Feed $M

26

455

26

10 Utilities Power $M

2.52

2.12

2.43

2.75

3.09

3.46

3.64

3.84

4.04

4.24

4.44

4.44

11 Utilities Water $M

0.53

0.44

0.51

0.57

0.64

0.72

0.76

0.8

0.84

0.88

0.93

0.93

12 Maintenance $M

10

8.43

9.63

10.91

12.26

13.72

14.44

15.23

16.03

16.83

17.63

17.63

13 Misc. Materials $M

15

12.64

14.45 1`6.36

18.39

20.57

21.65

22.85

24.04

25.25

26.45

26.45

14 Plant Labour $M

2.28

2.69

3.13

3.6

4.11

4.33

4.57

4.81

5.05

5.29

5.29

15

9.16

9.55

9.98

10.45

10.97

11.55

12.16

12.82

13.47

14.1

14.1

520.05

0 516.07 544.31

739.4 776.37 815.03

815.03

17 Product A Base Price $/BBL

33.5

33.5

35.18

36.93

38.78

40.72

42.76

44.89

47.14

49.49

51.97

51.97

18 Product A Extra Price $/BBL

30.15

30.15

31.43

32.85

34.41

36.13

38.02

40.11

42.22

44.33

46.44

46.44

345.89

0 207.53 250.67 297.37

348.1 403.44 440.65 463.02 486.34

510.4
6

536

536

53.86

Administration $M

16 Total Operating Cost $M

574 605.26 638.21 670.26 704.05

REVENUES

19 Product A Revenue $M
20 Product B Price $/BBL

32

56.42

56.42

21 Product B Revenue $M

196

0 134.62 163.73 195.54 230.43 268.84 292.95 298.51 314.18 329.89 345.56

345.56

637.54

0 606.23 648.19 692.89 740.93 793.01 850.57 895.27 941.18 988.24 1036.3
9

1036.39

22 Excess Feed Revenue $M


23 Total Revenue $M

36.63

38.19

163.8 129.99

39.91

90.29

41.8

47.4

43.89

46.2

48.74

51.3

FINANCIAL PICTURE
24 Cumulative Cash Flow $M

-72.1

- -151.4 -43.31
151.67 261.74 325.61 244.98

81.39

247.1 425.57 614.17 812.42 1019.7


4

1398.91

25 Discounted Cash Flow $M

-70

- -33.16
142.96 237.79 284.45 205.29 121.41

59.34 171.17 279.43 383.14 482.69 578.39

757.47

26 Annual Depreciation $M

22.5

22.5

22.5

22.5

22.5

22.5

22.5

22.5

22.5

22.5

22.5

27 Depreciated Book Value $M

250

250

250

250

227.5

205

182.5

160

137.5

115

92.5

70

47.5

25

25

28 Actual Annual Profit $M

94.99

67.66

81.3

96.39 113.16

132.3 157.82 168.72 179.28 168.36 198.86

1384.93

29 Discounted Annual Profit $M

94.99

59.11

68.2

77.29

86.63

96.46 109.32 110.78 111.84 112.51 112.79

944.92

30 Discounted Annual ROI %

20.02

12.96

14.95

16.94

18.99

21.15

23.97

24.29

24.52

24.66

24.73

20.72
Contd...

UNIT 4: Project Feasibility Econometric Model

59

31 Loan Interest/Repayment $M

45

32 Cumulative Cash Flow $M


33 Cash Retained $M

45
-257.9

45

45

- -79.89 -10.38
193.81

257.9 193.81

45

45

45

45

85.85 181.15 292.09 420.89

45

45

45

45

45

250

592.1 777.62 971.67 1172.8 1381.7


7
4

1760.91

79.89

10.38

30

60

100

150

210

250

290

15.47

11.63

5.99

0.03

2.55

5.4

9.5

15

22.05

27.5

30.43

32

32.53

210.91

35 Declared Annual Profit $M

55.85

65.3

70.94

78.8 111.21 143.32 154.05

171.2

184.4

1039.27

36 Discounted Annual Profit $M

46.8

52.36

54.3

57.45

77.94

95.55

96.1 101.72 105.73

687.05

37 Discounted Annual ROI %

37.44

41.97

43.44

45.91

61.63

76.64

34 Interest on Cash in Hand $M

375

45

76.88

320 342.47

81.37

84.5

375

54.96

Row 4: Land Cost, $M. The land cost of $20M is expended in


year 1 and also available as final recoverable sum. The initial
and final values are both multiplied by the Compounded
Escalation Factor (CEF).

Row 5: Plant Cost $M. The plant cost is estimated at $ 250M,


which will be spent @ 20% in year 1, 30% in year 2, 40% in
year 3 and last 10% in year 4. Expenditure in each year is
multiplied by CEF. The equation for the expenditure in year 3
(for example) is 250x0.4xCEF. The final cost is the residual
scrap value assumed as 10%. The final value is also multiplied
by CEF.
Row 6: Working Capital, $M. The working capital is estimated
at $20M plus 2 months of feedstock and product inventories.
The working capital is generated by an equation which
escalates the $20M and adds 2/12ths of the designed
feedstock/product quantities times the operating rate times the
feedstock/product prices for the year in question. Additional
working capital is needed each year to allow for escalation and
increased operating rates. The final residual value is the
cumulative value of all the working capital spent.

Row 7: Total Capital Cost, $M. This is the sum of rows 4


through 6.

)U

Operating Costs

Row 8: Feed Unit Cost, $BBL. This is the contractual feed for
the 10 year period. The initial cost is $26/bbl subject to a 5%
increase each year. The cost in year N is $26x1.05^N.

(c

___________________
___________________

___________________

PE

___________________

___________________

Capital Cost
z

Notes

LOAN ALTERNATIVES $M 125


CAPITAL + 250 LOAN

Row 9: Cost of Feed, $M. This value is the barrel per day
(50,000) times the number of operating days in the year (350)
times the feedstock unit cost. Since the contract requires that
the whole 50,000 barrels be taken, this number is not
multiplied by the operating rate.

___________________
___________________
___________________
___________________
___________________

Project Management & Its Applications

Row 10: Utilities Power, $M. Power requirements have been


estimated at 1.8 kWh/bbl of feed at design throughput. At
lower plant operating rates, the power usage per barrel will
increase by the 0.6 power. Electricity rates are initially $0.08
per kWh and are subject to escalation. The equation for power
costs thus becomes 50,000 x350x1.8x0.08xCEFx(POR/100)^0.6.

Row 11: Utilities Water, $M. Water requirements have been


estimated at 15 gallons per barrel. Water costs at $2.0 per
1000 gallons initially are subject to escalation. As with power,
water consumption per barrel increases to the 0.6 power at
lower operating rates. The equation for water costs is similar
to the equation for power costs 50,000x350x15x2.0/1,000xCEFx
(POR/100)^0.6.

Row 12: Maintenance, $M. Annual maintenance has been


estimated at $10M. This value is subject to escalation.
Maintenance costs are reduced at lower plant operating rates
and again the 0.6 power rule applies. The equation is
10xCEFx(POR/100)^0.6.

Row 13: Miscellaneous Materials, $M. Miscellaneous


materials are estimated at $15M. The same equation applies
as for maintenance.

___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________

(c

)U

___________________

Notes

PE

60

Row 14: Plant Labour, $M. Plant labour has been estimated at
100 persons, over all, at an average cost of $30,000 per year.
Plant labour is subject to escalation. At lower plant operating
rates, plant labour can be reduced slightly by the 0.8 power.
The equation is 100x30,000xCEFx(POR/100)^0.8.

Row 15: Administration, $M. General administrative and


overhead costs have been estimated at $15M per year. This
value is subject to escalation and is not changed by plant
operating rates.

Row 16: Total Operating Cost, $M. This is the sum of rows 8
through 15.

Revenues
z

Row 17: Product A Base Price, $/BBL. This is the contractual


price to be agreed with ABC Co. (client). A value of $33.5/bbl is
selected for the base case. This price will be subject to an
increase of 5% per year by contract. The price in year N is
33.5x1.05^N.

UNIT 4: Project Feasibility Econometric Model

Row 19: Product A Revenue, $M. This value is the total


product A multiplied with the above prices. For years 1 to 5 =
15000xABC price + (30,000xPOR-15000)xExtra price. For
years 6 to 10 = 25,000xABC price + (30,000xPOR-25,000)x
extra price.
Row 20: Product B Price, $/BBL. It is assumed that product B
can be sold on the open market. The initial market price is
$30/bbl. This value will be increased annually in line with the
compounded escalation factor.
Row 21: Product B Revenue, $M. Product B revenue will be
production (17,500) times the POR times the price in Row 20.

Row 22: Excess Feed Revenue, $M. Since XYZ (producer) is


contractually required to buy 50,000 bbl of feed regardless of
the plant operating rate, the excess feed must be sold on the
open market. It is assumed that the excess feed can be sold at
90% of the purchase price. The revenue will be 50,000x(100POR)/100x0.9xfeed price.

Row 23: Total Revenue, $M. This is the sum of rows 17


through 22.

)U

Financial Picture

Row 24: Cumulative Cash Flow, $M. This value is the


cumulative sum of the total revenues (row 23) minus the total
expenditures, i.e. total capital costs (row 7) and total operating
costs (row 16). Initially the cash flow is negative due to initial
capital outlays.

(c

61
Notes

Row 18: Product A Extra Price, $/BBL. Any product produced


over and above that required to meet the ABC contract level
will be sold on the open market. It is assumed that initially
this extra product may be sold at 90% of ABC's price but that
this price will strengthen over the years in line with the
escalation rate. The price equation will therefore be
33.5x0.9xCEF.

___________________
___________________
___________________
___________________
___________________

PE

Row 25: Discounted Cash Flow, $M. The discounted cash flow
is the actual cash flow in row 24 converted to present day
values. The annual values in row 24 are divided by the
compounded escalation factor (CEF).

Row 26: Annual Depreciation, $M. This value is the total


capital cost minus the residual value divided by the plant life.

___________________
___________________
___________________
___________________
___________________

Project Management & Its Applications

62

___________________
___________________
z

Row 27: Depreciated Book Value, $M. This is an accounting


figure and is equal to the capital cost minus the residual value
minus the annual depreciation to date.

Row 28: Actual Annual Profit, $M. This value is the total
annual revenues (Row 23) minus the total annual operating
costs (Row 16) and minus the annual depreciation (Row 26).

Row 29: Discounted Annual Profit, $M. This converts the


annual profit in row 28 to the present day value by dividing
the actual annual profit by the compounded escalation factor
(Row 2).

Row 30: Discounted Annual ROI, %. This row gives the value
that is of prime interest to investors. The discounted annual
profit (Row 29) is divided by the total initial design capital cost
to give the ROI. The final value gives the average over the
plant life.

___________________
___________________
___________________
___________________
___________________
___________________

(c

)U

___________________

PE

___________________

Since both land cost and working capital are residual, this
value equates to plant cost minus scrap value divided by plant
life. There are different methods of calculating depreciation.
This is the straight line method.

Notes

Loan Alternative

The econometric model up until now has assumed that all the
capital needed will be provided by the XYZ company. An
alternative to this is to raise a loan with fixed interest rate over
the project life including the construction period. The loan
repayment will be fixed and can be considered as operating cost.
The balance of any profit and the residual cost are then available
to the company and can be related to a lower investment cost.
To check out the economics of this alternative, a case is assumed
such that $250M is taken as loan over a 13 year period. An
additional $125M is raised as capital by the XYZ shareholders.
z

Row 31: Loan/Interest Repayment, $M. This shows the annual


interest due on $250M loan at 18% simple interest.

Row 32: Cumulative Cash Flow, $M. This is the same as row
24 except the project starts with $375M in hand and $45M in
interest is paid out each year.

Row 33: Cash Retained, $M. Available cash initially exceeds


requirements. Later excess cash is retained to build up capital

UNIT 4: Project Feasibility Econometric Model

Row 34: Interest on Cash in Hand, $M. The excess cash in


hand will earn interest. It is assumed that interest will be
earned at the annual inflation rate in Row 1.
Row 35: Declared Annual Profit, $M. In this case profit can be
declared at any level supported by the cash flow less the cash
retained.

Row 36: Discounted Annual Profit, $M. This is the present or


the discounted value of the annual profit. Row 35 is divided by
CEF.

Row 37: Discounted Annual ROI, %. In the loan alternative,


the profit is divided by the shareholders' capital of $125M only
since this is the shareholders' total investment. As can be seen,
although the total profit earned is lower, the ROI is
considerably higher due to the reduced investment.

)U

Analyzing the Financial Picture

Now that the econometric model is complete, it is possible to


examine the profitability of the venture. The base case yields an
average annual ROI of 20.72% over the 10 years which is at the
desired target level. Actually, the profitability may be higher than
shown, since not all the working capital is expended initially and
some interest could be earned on excess cash in hand. Also the
residual value plus the depreciated value exceeds the initial
investment. If desired, the econometric model could be adjusted to
show these details, however, the base case results shown are
probably close enough for analysis and decision making.

Check Your Progress

Fill in the blanks:

(c

Notes

___________________
___________________
___________________
___________________
___________________

PE

63

to pay off the loan. To compare the loan alternative with the
base case, the final cash retained equals the loan plus
investment capital, leaving the residual value the same as the
base case.

1.

The first step in preparing an model is


to set up the columns and rows required.

2.

shows the predicted rate of annual


inflation for the entire project life of 13 years.

___________________
___________________
___________________
___________________
___________________

Project Management & Its Applications

Notes
Activity
___________________
Modify
econometric model of
your project by assuming
debt___________________
equity ratio of 1:1, i.e.
project financing through 50%
loan___________________
and 50% equity.

Modifying the Variables

64

___________________

Case A. Project capital cost overruns by 50%.

___________________

Case B. Annual inflation rate runs 15% higher than predicted


rate.

Case C. Operating rate runs 10% lower than hoped for in first
five years.

Case D. Due to competitive market, proposed price of product


A to ABC company must be reduced by 10%.

Case E. Market for product B is less buoyant than anticipated,


cut by 20%.

___________________
___________________
___________________
___________________

PE

___________________

Now that the econometric model has been set up, unlimited What
if simulations may be carried out to see the effect on the bottom
line. The inter-meshing equations on the spread sheet instantly
adjust all related values in the columns and rows to show the new
picture. To illustrate this, following five "what ifs" are simulated.

(c

)U

All of these changes can be entered singly or in combination and


the spread sheet will instantly adjust.

Simplicity and Flexibility


The personal computer with a spread sheet can be used to create a
tailor made econometric model that can be as complex as you want
it to be.

Check Your Progress

Fill in the blanks:


1.

simulations may be carried out to see the


effect on the bottom line.

2.

Due to competitive market, proposed price of product A


to ABC company must be reduced by percent.

Summary

This unit provides a simplified method of evaluating economic


feasibility of a project by preparing its econometric model on a PC.
It also offers insight into various factors that could affect project
feasibility. This provides good initial evaluation of a project.

UNIT 4: Project Feasibility Econometric Model

Lesson End Activity

65

___________________
___________________
___________________
___________________
___________________

PE

Keywords

Notes

Establish capital cost of a project familiar to you. Select the most


expensive component of capital cost and list out ways to minimize
its cost. (In case you have not dealt any project, select/formulate a
project which will be called your project in future activities.)

Capital Costs: One-time setup cost of a plant or project, after


which there will only be recurring operational or running costs.

___________________

Econometric Model: An econometric model is one of the tools


economists use to forecast future developments in the economy.

___________________

Inventory: A complete list of items such as property, goods in


stock, or the contents of a building.

Operating Cost: Operating costs are the expenses which are


related to the operation of a business, or to the operation of a
device, component, and piece of equipment or facility.

)U

Revenue: The amount of money that a company actually receives


during a specific period, including discounts and deductions for
returned merchandise.
Working Capital: Working capital is defined as the difference
between current assets and current liabilities.

Questions for Discussion

Define most commonly used finance term involved in


developing a project.

2.

List factors used in structuring a project.

3.

Describe economic factors affecting development of new


project.

4.

Analyze effect of various economic factors in econometrics


model for a project.

(c

1.

5.

Explain the significance of various cost components of a


project.

6.

What are the main constituents of Econometric Model and


their significance?

___________________

___________________
___________________

Project Management & Its Applications

Notes

Further Readings

66

Books

___________________

Clements/Gido, Effective Project Management, Thomson.

___________________
___________________

Clifford F. Gray and Erik W. Larson, Project Management, Tata


McGraw Hill.

___________________

Dennis Lock, Project Management, Ninth Edition, Gower.

___________________

K. Nagarajan, Project Management, Third Edition, New Age


International.

___________________
___________________
___________________
___________________

PE

___________________

Prasanna Chandra, Projects-Planning, Selection, Financing,


Implementation and Review, Sixth Edition, Tata McGraw Hill.
P.C.K. Rao, Project Management and Control, Sultan Chand &
Sons.
Vasant Desai, Project Management, Second Revised Edition,
Himalaya Publishing House.

Web Readings

(c

)U

http://wwwpersonal.umich.edu/~franzese/SpatialEconometricMode
ls.Proposal2.ProjectDescription.pdf
http://www.econ.cam.ac.uk/emeritus/pesaran/nonleoa.pdf
http://www.healthmetricsandevaluation.org/research/project/quant
itative-analysis-feasibility-achieving-zero-preventable-child-deaths
http://www.google.com/url?sa=t&rct=j&q=Project+FeasibilityEconometric+Model&source=web&cd=13&cad=rja&ved=0CDUQFj
ACOAo&url=http%3A%2F%2Fwww.sajhrm.co.za%2Findex.php%2
Fsajhrm%2Farticle%2Fdownload%2F96%2F96&ei=HCh6Uc3EE4
TzrQf3moDoCg&usg=AFQjCNHVBk28MHby1K7wpk3SvIDp

tseA&bvm=bv.45645796,d.bmk
http://pareto.uab.es/mcreel/econometrics/econometrics.pdf

http://mirror.cict.fr/cran/web/packages/plm/vignettes/plm.pdf

UNIT 5: Case Study

Unit 5

67

Case Study

___________________
___________________
___________________

Objectives

___________________
___________________

A Business tale of what it takes to turn around Troubled


Projects.

The year is 2005 and times are good. The business environment is
vibrant and the economy is strong. Large businesses are
committing large amounts of capital and resources to implement
new strategies, establish new capabilities, and open new markets.
It was not different at PintCo, where Jack works as a Director of
Customer Relationship Management.

)U

Jack walked into work on Monday morning like any other. He


dropped his briefcase in his office, grabbed a cup of coffee and
headed down the hall to meet with his boss, Brandon, about one of
the company's troubled projects. Although Jack had substantial
experience, he had only recently joined PintCo after being hired
away from a chief competitor. He was still learning about some of
the nuances of his current employer.
After the typical morning banter, Brandon and Jack got to the
topic at hand. "Jack, I'll get straight to the point. I need to you to
take over the Customer Master File project from Paul." Brandon
said. He continued, "We hired you because of your significant
project management expertise. I know that you've turned around
a lot more difficult situations than this." Over an hour later, Jack
emerged from Brandon's office and set out to learn more about the
challenge that Brandon had posed to him.

Jack was an experienced business leader and project manager. He


had seen more than his fair share of ugly projects; some he turned
around while others had spun hopelessly out of control. He would
be able to tell very quickly how this one would go based on the
makeup and culture of the project team.
Trouble Waters

(c

___________________

PE

After analysing this case, the student will have an appreciation of the
concept of topics studied in this Block.

Case Study: A Tale of Two Projects

Notes

Over the course of the next few weeks, Jack took over the
Customer Master File project, met with key project team
members, and conducted dozens of interviews with key
stakeholders. It was only a few weeks since Brandon had handed
the keys to him for this troubled project, and now Jack was back
in Brandon's office to give a rather stark update on the situation.
"Brandon, I've talked to the project team and to key stakeholders,
and I know why this project is in trouble," Jack started. "If you
Contd...

___________________
___________________
___________________
___________________

Project Management & Its Applications

___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________

truly want me to turn this project around, I'll need your support
to make some critical changes."

Notes

Brandon, a 20-year veteran at PintCo, knew what was coming. He


had seen too many projects start, flounder, and then fail at the
company. He didn't want to hear that another project was on the
brink of failure, but he asked anyway, "What did you find out,
Jack, and what can I do to help?"

Jack drew a deep breath and began to explain his findings.


"Brandon, as you know this project has been in flight for nearly
6 months now and it is already behind schedule and over budget."
Jack went on, "In talking to the project team and other
stakeholders, I don't see the situation getting better without
making some pretty significant changes."

PE

68

Jack's experience helped him to quickly identify a number of


critical issues with the project, which he carefully outlined for
Brandon:
z
z
z
z
z

"The scope of the project is not well defined,"

"The IT architects are sitting in their ivory towers and


disagree with the project's direction,"
"The project team is not functioning as a team,"

"There is a lack of clear executive sponsorship, and"


"Steve from Marketing is trying to manipulate this project
for his own political gain."

(c

)U

"I'm not going to sugar coat this for you Brandon," Jack explained.
"I've seen this situation far too often in my career, and if we don't
change the situation this project will fail in glorious fashion."
Foundations for Success
Brandon knew that what Jack said was true, and he also knew
that changing the situation would be difficult, painful, and
potentially costly. He reluctantly agreed with Jack, and together
they laid out several key changes.
"Thanks for working with me on this Brandon," Jack said. "Just
to confirm, let me summarise the changes that we agreed to
implement:
z

"First, we're going to stop the current project and recreate a


clear and well-defined scope and get consensus buy-in on the
new scope."

"Second, we're going end the architectural holy wars by


assigning key IT architects to the project on a full time
basis."

"Third, we're going to co-locate the team and assign members


to a full-time basis on the project. No more part-time
participation."

"Fourth, Brandon, you agree to be much more visible and an


active participant to drive key decisions for the project, and"

"Finally, Brandon you are going to have a heart-to-heart


with Steve and if necessary his boss to eliminate any
political agendas that could derail the project."
Contd...

UNIT 5: Case Study

Celebrations

"Thank you," Jack smiled and answered, "but you know it was
pretty touch and go after we met in your office to plan the project
turnaround. There were a lot of unhappy campers and several of
them didn't like the idea of being assigned 100% to the project if
you recall."

"But we quickly converted them and now I see a project team


that is hitting on all cylinders," Jack added. "In fact, Sharon told
me she was ready to quit six months ago and now she's happier
than ever and up for promotion." Jack explained.
"I love it when a plan comes together," Jack said proudly as he
turned to walk away and take on his next big project.

)U

Question:

Analyse the case and write down the case facts of your study.
Source: http://www.projectsmart.co.uk/a-tale-of-two-projects.html

(c

Notes

___________________
___________________
___________________
___________________
___________________

PE

Six months later, Jack ran into Brandon in the break room as
they both were angling for their morning coffee refill. "Jack!",
Brandon shouted while patting Jack on the back.
"Congratulations on getting the Customer Master File project into
pilot. By all accounts, it has been a resounding success!" Brandon
crowed.

69

Brandon and Jack both agreed with the plan. Jack knew that
some of these changes would be unpopular, but without them the
project would be doomed. He left Brandon's office with a sense of
relief and apprehension. There was still a lot of hard work and
heavy lifting yet to be done.

___________________
___________________
___________________
___________________
___________________

Project Management & Its Applications

70

Notes
___________________
___________________
___________________

___________________
___________________
___________________
___________________
___________________

(c

)U

___________________

PE

___________________

UNIT 6: Project Planning

71

Notes

___________________
___________________
___________________
___________________

PE

___________________
___________________
___________________
___________________
___________________
___________________

(c

)U

BLOCK-II

72

Notes

Project Management & Its Applications

UNIT
6: PROJECT PLANNING
___________________
z
Introduction
___________________
z
Meaning of Project Planning
___________________
z
Need of Project Planning

Detailed Contents

UNIT 8: PROJECT COST CONTINGENCY


z

Introduction

Contingency Definition

The Need for a Contingency

___________________
Project Life Cycle

Method of Determining Contingency

Project Planning Process


___________________

Maximum Risk Contingency

Work Breakdown Structure (WBS)


___________________

___________________
UNIT
7: PROJECT COST AND RISK
MANAGEMENT
___________________
z
Introduction
___________________
z
Types of Project Estimates
___________________
Fixed Capital Cost Estimation

Project Risk Management

UNIT 9: SENSITIVITY ANALYSIS


z

Introduction

Concept of Sensitivity Analysis in Project


Management

Settings and Constraints

UNIT 10: CASE STUDY

(c

)U

PE

UNIT 6: Project Planning

Unit 6

73

Project Planning
Objectives

Meaning of Project Planning

Need of Project Planning

Project Life Cycle

Project Planning Process

Work Breakdown Structure (WBS)

___________________
___________________

PE

After completion of this unit, the students will be aware of the following
topics:

Notes
Activity
___________________
Develop
the activity for your
organisation which must be
___________________
related
to the achievement of
some planned objective.
___________________

___________________
___________________
___________________
___________________
___________________

Introduction

)U

A project is a set of tasks or activities related to the achievement of


some planned objective. Normally these objectives are either
unique or non-repetitive in nature. Thus, a project is usually
distinguished from repetitive or continuous production process by
the characteristic of uniqueness of the objective.

Organisations carry out a wide variety of programs and projects.


Experience reveals that a key condition for success is proper
planning. Success is important for organisations to grow year by
year and thus, it becomes necessary for a growing organisation to
resort to effective growth plan.

(c

Projects may involve routine procedures where project planning


techniques are useful for detailed analysis and optimization of the
operating plan. The plan needs to be properly prepared and this is
possible only if the manager has sufficient knowledge of the
various processes of the project. The manager has to work on the
various projects life-cycle stages and apply necessary planning
tools to come out with a proper growth plan for the company. This
unit deals with the project planning and project life cycle.

Meaning of Project Planning


Project planning is a discipline for stating how to complete a
project within a certain timeframe, usually with defined stages,

Project Management & Its Applications

___________________
___________________
___________________
___________________
___________________

and with designated resources. One view of project planning


divides the activity into:

Notes

Setting objectives (these should be measurable)

Identifying deliverables

Planning the schedule

Making supporting plans

PE

74

___________________

Project Planning is a very vital aspect of project management,


which relates to the use of schedules such as Gantt charts to plan
and subsequently report progress within the project environment.

___________________

It serves many important functions that are as follows:

___________________

___________________

It provides a basis for organising the work and allocating


responsibilities to individuals.

It helps the manager to look ahead and do planned scheduling


for various activities, taking into account the different
resources available and the availability of various floats.

It helps in providing effective communication, as job allocation


and accountability is well established.

(c

)U

___________________

It helps in establishing the other two phases: Scheduling,


Monitoring & Controlling.

A comprehensive project planning involves:


(i) Planning Project Work: All activities of the project must be
fully defined and sequentially shown, with their early start
and latest finish.
(ii) Planning Resources: Scheduling of various activities along
with time and resources needed such as manpower
managers, supervisors and operators; and responsibility of
carrying out the assigned job must be reflected.
(iii) Planning Money: All projects are basically Capital Projects,
requiring huge money for completion and earning no return
till their successful completion & operation of the same and
keeping in view the time value for money, all expenses must
be well planned and in time-phased manner.
(iv) Planning Information System: Proper MIS is needed at all
stages of the project. It is essential for an effective
communication, efficient use of resources and keeping the

UNIT 6: Project Planning

This clearly shows that the project planning can be regarded as a


value-added activity.

Check Your Progress

75
Notes
Activity
___________________
Critically
examine the situation
when the need of project
___________________
planning
arises.

project well within control: from time as well as cost point of


view.

___________________
___________________
___________________

PE

Fill in the blanks:


1.

is a very vital aspect of project management.

2.

All projects are basically needing huge


money for completion and there being no return till
their successful completion.

___________________
___________________
___________________
___________________

Need of Project Planning

The purpose of project planning is to first, identify the areas of the


project work and the forces affecting the project and then, to define
the boundaries of the project. In addition, the scoping has to be
explicitly stated on the line of the project objectives. It also has to
implicitly provide directions to the project.

)U

Planning at some level is basic to all human activity, and it


requires common sense. It involves working out what you want to
do and how you are going to do it. This applies whether you are
preparing a straightforward and simple project or a long-term
program.
Planning involves:

identifying priority needs and opportunities,

discussing and testing the various possible courses of action,

choosing the most appropriate one (or ones),

agreeing what you can expect to achieve,

calculating the human and material resources needed to reach


your objectives,

(c

anticipating possible problems, and

getting agreement among all concerned about clear targets


and timetables for the work in view.

Planning techniques can address many organisational problems


and opportunities, including institutional development of your
organisation and planning of disaster preparedness activities.

___________________

Project Management & Its Applications

___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________

The planning and scoping should be such that the project manager
can assess every stage of the project and the quality of the
deliverable of the project at every stage. First, let us list the steps
involved in project scoping.
These steps include:
z

Identifying the various parametric forces relevant to the


project and its stages,

Enabling the team members to work on tools to keep track of


the stages and thereby proceed in the planned manner,

Avoiding areas of problems which may affect the progress of


the project,

(c

)U

___________________

Whether the priority is capacity building, disaster preparedness,


immediate emergency action or new initiatives such as advocacy
for vulnerable groups, good planning can increase your chance of
success. It helps you analyse and assess present needs and future
challenges. It gives you the means to test out various possibilities,
think through the difficulties that might occur and prepare to
overcome them. Good plans always allow for flexibility to adapt to
changing circumstances.

Notes

PE

76

Eliminating the factors responsible for inducing the problems,

Analysing the financial implications and cost factor at various


stages of the project,

Understanding and developing the various designs required at


various stages of the project,

Identifying the key areas to be included in the scope through


various meetings, discussion, and interviews with the clients,

Providing a base and track to enable alignment of project with


the organisation and its business objectives,

Finding out the dimensions applicable to the project and also


the ones not applicable to the project,

Listing out all the limitations,


constraints in the project.

boundary

values

and

UNIT 6: Project Planning

77

True or False:

2.

The purpose of project planning and scoping is to first


identify the areas of the project work and the forces
affecting the project and then to define the boundaries
of the project.
Good plans always does not allow for flexibility to adapt
to changing circumstances.

)U
Phase 3:
Project
Planning

Phase 4:
Project Execution
and Control

Phase 5:
Project
Closeout

Figure 6.1: Project Life Cycle

Let us now try to understand the project life cycle with reference to
the process flow mentioned above.

Project Origination

In project origination, an individual proposes a project to create a


product or develop a service that can solve a problem or address a
need in the performing organization. The performing organization
then submits the proposal to an evaluation and selection process. If
selected, a budget or further management commitment for the
project may also be required, before a project manager is actually
assigned and the project is authorized to progress to project
initiation. Depending upon the standards and practices of the

(c

___________________
___________________

___________________

The project management life cycle defines how to manage a project.


It includes processes such as origination, initiation, planning,
execution/control, and closeout. While no two projects are exactly
alike, the project management life cycle will always be the same,
regardless of the project type. All projects should progress through
these same five project management phases:

Phase 2:
Project
Initiation

___________________

___________________

Project Life Cycle

Phase 1:
Project
Origination

___________________

PE

1.

Notes
Activity
___________________
Prepare
a
presentation
showing the Project Life
___________________
Cycle.

Check Your Progress

___________________
___________________

Project Management & Its Applications

___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________

Project Initiation

At the beginning of project initiation, a project manager is


assigned. The project manager works with the project sponsor to
identify the necessary resources and team members needed to
further develop the key project parametersCost, Scope, Schedule,
and Quality (CSSQ). The project team documents its charge in the
form of a project charter, which is based on the project proposal
and business case. Approval of the project charter by the project
sponsor authorizes the designated team to begin project planning.

Project Planning

This is the third phase of project management life cycle. Project


planning builds on the work done in project initiation, through the
development of a project plan. The project plan defines CSSQ, and
includes plans for involving and communicating with all the
parties that are affected by the project, as well as identification of
an initial set of foreseeable risks that can threaten the project.
Additional key elements of the project plan are the change control
process and externally focused items such as organizational change
management and project transition plans. At the conclusion of
project planning, the business case is revised and re-evaluated
based on the completed planning documents and a decision is
again made either to halt the project, or to commit the resources
necessary for project execution and control.

(c

)U

___________________

performing organization, a time delay between the projects


proposal and selection and its actual initiation may occur.

Notes

PE

78

Project Execution and Control


Project execution and control is where most of the resources are
applied/expended on the project. A significant number of team
members will join the project at the beginning of this phase. The
primary task of the project manager during project execution is to
enable the team to execute the tasks on the defined project
schedule and develop the product or service which the project is
expected to deliver. The project manager uses the processes and
plans prepared during project initiation and project planning to
manage the project. He also helps in the implementation of the
product/service and for transitioning the product/service
responsibility from the project team to the performing
organization.

UNIT 6: Project Planning

Project Closeout

79

Check Your Progress


Fill in the blanks:

S
___________________
___________________
___________________
___________________
___________________
___________________
___________________

The then submits the proposal to an


evaluation and selection process.

2.

The project team documents its charge in the form of a


, which is based on the project proposal
and business case.

)U

1.

Project Planning Process

After completing the project scoping, you can start your project
plan. Project planning involves three processes as shown in the
figure 6.2.

The
identification
process

(c

Notes
Activity
___________________
Make
an assignment on the
process of Project Planning.
___________________

PE

In project closeout, the project team assesses the outcome of the


project, as well as the performance of the project team and the
performing agency. This is accomplished primarily through
soliciting and evaluating feedback from customers, project team
members, consumers and other stakeholders. The primary purpose
of this assessment is to document best practices and lessons
learned for use on future projects. Key project metrics are also
captured to enable the performing organization to compare and
evaluate performance measurements across projects.

The review
process

Project
Planning
Process

The analysis
process

Figure 6.2: Project Planning Process

___________________

Project Management & Its Applications

Notes
___________________
___________________
___________________

Let us now list the steps involved in each process of project


planning. These are:

The Identification Process

80

The main steps in the identification process of any project are:


Identifying initial requirements.

___________________

Validating them against the project objective.

___________________

Identifying the criteria such as quality objectives and


quantitative requirements for assessing the success of both the
final product and the process used to create it.

Identifying the framework of the solution.

Preparing a template of the framework of solution to illustrate


the project feasibility.

Preparing relevant charts to demonstrate the techniques of


executing the project and its different stages.

Preparing a proper project schema of achieving the defined


business requirements for the project.

Identifying training requirement.

Making a list of the training program necessary for the


personnel working on the project.

Identifying the training needs of the individuals working in


various functions responsible in the project.

Preparing a training plan and a training calendar.

Assessing the capabilities and skills of all those identified as


part of the project organisation.

___________________
___________________
___________________

(c

)U

___________________

PE

___________________

The Review Process

The main steps in the review process of any project are:


z

Establishing a training plan to acquaint the project team


members with the methodologies, technologies and business
areas under study.

Updating the project schedule to accommodate scheduled


training activities.

Identifying the needs for review and reviewing the project


scope.

UNIT 6: Project Planning

Reviewing the project scope, the objective statement, and the


non-conformances in the project stages and identifying the
need to use the project plan.
Preparing a proper project plan indicating all the
requirements from start to finish of the project and also at
every stage of the project.
Preparing a checklist of items to be monitored and controlled
during the course of execution of the project.

The Analysis Process

The main steps in the analysis process of any project are:

Comparing the actual details with that in the plan with


reference to project stages.

Measuring various components of the project and its stages


frequently to control the project from deviating and also
monitor the performance.

Deciding how the task, the effort and the defects are to be
tracked, what tools to be used, what reporting structure and
frequency will be followed at various stages.

Identifying the preventive and corrective steps to be taken in


case of any variance.

Performing root cause analysis for all problems encountered.

)U

If all the above steps are performed successfully, scoping and


planning become effective and the ideal outcomes are achieved.
The team must strategise as to how they will work the project with
the customer and how they will achieve the end goals of the project
successfully and to the customers satisfaction. Then they must
write a scope statement to define project boundaries. The scope,
such as what will and will not be done on the project, should be
part of the project plan.

(c

81
Notes

Reviewing a project with respect to its stages and progress by


preparing a plan for the review, fixing an agenda to review the
project progress and keeping the reports ready for discussion
about stage performance.

___________________
___________________
___________________
___________________
___________________

PE

The next step is to develop a Work Breakdown Structure (WBS).


They must create the work breakdown structure detailing all the
tasks and sub-tasks that will go into production of the final.

___________________
___________________
___________________
___________________
___________________

Project Management & Its Applications

___________________
___________________
___________________
___________________
___________________
___________________
___________________

After preparing WBS, they prepare the project schedule and


budget. This includes the tasks identified in the work breakdown
structure and assign resources or at least resource positions, if the
actual resource names have not been identified yet. The step that
follows is deciding on the project organization structure and
documenting the proposed project organization structure as a part
of the project planning process. Now, they must identify whether it
will be a matrix or hierarchical reporting structure. Finally, the
manager must put the formal project plan through a formal review
process on his project team, possibly senior management if its a
visible enough project, and definitely the customer. Now, he must
get a formal approval sign-off from the customer and store the
document with all other project materials.

Notes
Activity
___________________
Write
an essay on Work
Breakdown Structure.
___________________

PE

82

Check Your Progress

___________________

Fill in the blanks:


1.

Identifying the and corrective steps to be


taken in case of any variance

(c

)U

2.

the criteria such as quality objectives and


quantitative requirements for assessing the success of
both the final product and the process used to create it

Work Breakdown Structure (WBS)


The entire process of a project may be considered to be made up on
number of sub-process placed in different stages called the Work
Breakdown Structure (WBS).
The format for WBS design is used differently by different people
to depict the work breakdown structures. Mostly graphics is used
to display the project components as a hierarchical tree structure
or diagram.
The general WBS of a project is shown in Figure 6.3.
Here, project is first broken down into blocks or groups or tasks
and these are placed at level 1. Each block of level 1 is then
composed into sub-blocks and is placed at level 2. This process is
continued up to the level beyond which division does not fulfil any
useful purpose. The smallest block is often termed as workpackage or activity.

UNIT 6: Project Planning

83

Notes

___________________
___________________
___________________
___________________

PE

___________________
___________________
___________________
___________________
___________________

A typical example of a WBS of a recruitment process is indicated in


Figure 6.4.

___________________

)U

Figure 6.3: General WBS of a Project XYZ

Figure 6.4: Work Breakdown Structure (WBS)

(c

In other words, WBS is the technique to analyse the content of


work and cost by breaking it down into its component parts.
Project key stages form the highest level of the WBS, which is then
used to show the details at the lower levels of the project. Each key
stage comprises many tasks identified at the start of planning and
later this list will have to be validated. WBS is produced by
identifying the key elements, breaking each element down into
component parts and continuing to breakdown until manageable
work packages have been identified. These can then be allocated to
the appropriate person. The WBS does not show dependencies

Project Management & Its Applications

Notes

other than a grouping under the key stages. It is not time based.
There is no timescale on the drawing.

___________________

Check Your Progress

___________________

___________________

True or False:
1.

___________________
___________________
___________________
___________________
___________________
___________________

2.

The entire process of a project may be considered to be


made up on number of sub process placed in different
stage called the Work Breakdown Structure.

PE

___________________

84

WBS is produced by identifying the key elements,


breaking each element down into component parts and
continuing to breakdown until manageable work
packages have been identified.

Summary

Project Planning is a very vital aspect of project management. The


purpose of project planning and scoping is to first identify the
areas of the project work and the forces affecting the project and
then to define the boundaries of the project.

(c

)U

The project management life cycle defines how to manage a project.


It includes processes such as origination, initiation, planning,
execution/control, and closeout. While no two projects are exactly
alike, the project management life cycle will always be the same,
regardless of the project type. The team must strategize as to how
they will work the project with the customer and how they will
satisfy the end goals of the project successfully and to the
customers satisfaction. The entire process of a project may be
considered to be made up on number of sub process placed in
different stage called the Work Breakdown Structure (WBS). WBS
is the technique to analyse the content of work and cost by
breaking it down into its component parts.
After going through this unit, you must have realised the
importance of project planning in business applications and the
scope of project planning. Also, you are now familiar with the
various phases involved in project planning process.

Lesson End Activity


As a manager, create a project plan for your company.

UNIT 6: Project Planning

Keywords

85

Project Execution and Control: Project Execution and Control is


where most of the resources are applied/expended on the project.

___________________
___________________
___________________
___________________
___________________

PE

Project Management Life Cycle: The project management life


cycle defines how to manage a project. It includes processes such as
origination, initiation, planning, execution/control, and closeout.

Notes

Performing Organisation: It refers to the enterprise whose


employees are most directly involved in doing the work of the
project.

Project Manager: It refers to the individual responsible for


managing the project.
Project Origination: In project origination an individual
proposes a project to create a product or develop a service that can
solve a problem or address a need in the performing organization.

)U

Project Planning: The purpose of project planning and scoping is


to first identify the areas of the project work and the forces
affecting the project and then to define the boundaries of the
project.

Work Breakdown Structure (WBS): The entire process of a


project may be considered to be made up on number of sub process
placed in different stage called the Work Breakdown Structure
(WBS).

Questions for Discussion

Define project planning. Describe it in detail.

2.

Why project planning is important? Also discuss the need of


project planning.

3.

Explain the life-cycle of a project.

4.

Describe various stages of project life cycle.

5.

Describe the project planning process and explain it in detail.

6.

What do you mean by work break down structure? Discuss it


briefly.

(c

1.

___________________
___________________
___________________
___________________
___________________

Project Management & Its Applications

Notes

Further Readings

86

Books

___________________

Clements/Gido, Effective Project Management, Thomson.

___________________
___________________

Clifford F. Gray and Erik W. Larson, Project Management, Tata


McGraw Hill.

___________________

Dennis Lock, Project Management, Ninth Edition, Gower.

___________________

K. Nagarajan, Project Management, Third Edition, New Age


International.

___________________
___________________
___________________
___________________

PE

___________________

Prasanna Chandra, Projects-Planning, Selection, Financing,


Implementation and Review, Sixth Edition, Tata McGraw Hill.
P.C.K. Rao, Project Management and Control, Sultan Chand &
Sons.
Vasant Desai, Project Management, Second Revised Edition,
Himalaya Publishing House.

Web Readings

(c

)U

http://www.ee.ed.ac.uk/~gerard/Management/art8.html
http://www.mindtools.com/pages/main/newMN_PPM.htm
http://www.projectsmart.co.uk/project-planning-step-by-step.html
http://searchcrm.techtarget.com/definition/project-planning
http://www.businessballs.com/project.htm

UNIT 7: Project Cost and Risk Management

Unit 7

87

Project Cost and Risk


Management

Notes
Activity
___________________
Sub-divide
your project into its
units or areas. Apply the
___________________
common
code of accounts to
each sub-division.
___________________
___________________

After completion of this unit, the students will be aware of the following
topics:
\

Types of Project Estimates

Fixed Capital Cost Estimation

Project Risk Management

___________________

PE

Objectives

___________________
___________________
___________________
___________________
___________________

Introduction

)U

An estimate, by definition, is an approximate computation of the


probable cost. It is unusual that the project final cost matches the
initial estimate. Those who are unfamiliar with estimating
methods may expect more details and more accuracy in an
estimate than is achievable. There are so many variables and
unknowns at the time an estimate is prepared that arriving at a
reasonably close overall cost estimate is more art than science.
Skill and judgment is needed to identify and predict the unknown.
Those unfamiliar with estimating methods are more likely to
accept a contingency figure which can be supported by analysis
than a number which appears to be someone's best guess. Simple
systems, which can be readily applied to a variety of estimates for
the analysis of contingency and risk, are described hereunder.

Types of Project Estimates

The following are generally accepted definitions:

Contingency: A provision for an occurrence dependent upon


chance, accident or uncertain event.

Risk: Exposure to mischance, danger, hazard, injury, damage,


bad consequence or loss.

Sensitivity: The quality of being keenly susceptible and


responsive to external forces.

(c

Project Management & Its Applications

Notes
Activity
___________________
Prepare
cost estimate of each
unit of your project in line
with___________________
Table 7.2. Prepare your
project total cost estimates.
___________________

Analysis: A separating or breaking up of any whole into its


parts so as to find out their nature, proportion, function and
relationship.

88

Contingency, risk and sensitivity analysis can be applied to any


part of a project cost estimate such as:
z

Fixed capital

___________________

Working capital

___________________

Operating cost

___________________

Here we will discuss the application of contingency, risk and


sensitivity analysis to the fixed capital cost estimates. The concept
can equally apply to working capital and operating cost estimates.

___________________
___________________

PE

___________________

Check Your Progress

___________________

Fill in the blanks:


1.

Contingency, risk and sensitivity analysis can be


applied to any part of a cost estimate.

(c

)U

2.

is a provision for an occurrence dependent


upon chance, accident or uncertain event.

Fixed Capital Cost Estimation


The first step in the preparation of fixed capital cost estimates is to
sub-divide the project into its units or areas. A typical refining or a
petrochemical complex may be subdivided as shown in Table 7.1.
This is not intended to be a complete list. It merely illustrates the
first step in breaking down an overall complex into specific units,
areas or categories to facilitate cost estimation.
The next step is to take each of these major subdivisions and apply
a common code of accounts which will apply to all project
subdivisions as shown in Table 7.2.

Project Subdivisions

Table 7.1: Subdivision of a Typical Refining Complex


00 Process Plants
01 Crude Unit
02 Reforming Unit
03 Desulfurising Unit
Contd...

UNIT 7: Project Cost and Risk Management

89

10 Utilities & Services


11 Water Facilities
12 Steam Facilities

___________________

13 Electrical Facilities

___________________

14 Fuel Facilities
15 Flare & Blowdown Facilities
16 Waste Disposal Facilities

22 Distribution Systems

23 Loading & Unloading Facilities


24 Material Handling Facilities
25 Dock & Wharf Facilities
30 Civil Works

31 Fences, Roads, Railroads, Dykes

32 General Administration Buildings


40 Miscellaneous Accounts
41 Spare Parts

42 Catalyst, Chemicals & Consumables


43 Maintenance Equipment

44 Mobile & Transportation Equipment

)U

45 Laboratory & Machine Shop Equipment


46 Office Furniture & Equipment

Code of Accounts

Table 7.2: A Code of Accounts Applied to all Project Subdivisions


A

Equipment

A1

Heaters

A2

Tanks & Vessels

A3

Heat Transfer Equipment

A4

Rotating Equipment

Bulk Materials

B1

Civil Works
Buildings

B3

Piping

B4

Electricals

B5

Instrumentation

(c

B2

B6

Protective Coatings

Services

C1

Home Office

C2

Construction

C3

Miscellaneous

___________________
___________________
___________________

PE

20 Storage & Transportation


21 Tankage

Notes

___________________
___________________
___________________
___________________
___________________

Project Management & Its Applications

___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________

A cost estimate summary is then made up for each unit or area of


the total project by code of accounts, covering material, labour and
subcontracts, as shown in Table 7.3.

Notes

When each unit has been estimated in this way, then the estimate
for the total project is the sum of the unit cost estimates. This can
be assembled in a matrix as shown in Table 7.4.

There is nothing new about this. This is the HPI's standard


way of building up estimates. Standardized methods and
techniques and the use of common codes of accounts assist with the
build up of cost statistics and the transfer of cost data and ratios
from one project to another.

PE

90

Table 7.3: Project Code of Accounts for Each Unit or Area of the Project
Acct

Description

Material Labour Sub-Contract Total

Equipment

A1

Heaters

A2

Tanks and Vessels

A3

Heat Transfer Equipment

A4

Rotating Equipment

Bulk Materials

(c

)U

Sub-Total

B1

Civil Works

B2

Buildings

B3

Piping

B4

Electricals

B5

Instrumentation

B6

Protective Coatings

Sub-Total

Services

C1

Home Office

C2

Construction

C3

Miscellaneous

Sub-Total
Total

Table 7.4: The Overall Project Estimates Matrix

Acct

Description

Process plant

Utilities
&
Services

Storage
&
Transport

Civil
Works

01 02 03 04 11 12 13 14 21 22 23 24 31

Misc.

Total

32 33 41 42 43

Acct Description
A

Equipment

A1

Heaters

A2

Tanks & vessels

A3

Heat Transfer Equipment


Contd...

UNIT 7: Project Cost and Risk Management


A4

91

Rotating Equipment
Sub-total
Bulk Materials

B1

Civil Works

B2

Buildings

B3

Piping

Notes

___________________
___________________

B4

Electricals

B5

Instrumentation

B6

Protective Coatings

___________________
___________________

Sub-total

___________________

Services

C1

Home Office

C2

Construction

C3

Miscellaneous

PE

___________________
___________________

Sub-total
Total

Estimate Accuracy

)U

Having prepared the unit and overall project estimates, the next
question is "What is the accuracy?" A higher level of accuracy may
be expected than is realistic. However, if the accuracy probability
is assessed by a formal analytical procedure, then it will be more
likely that a realistic contingency will be set.

(c

Figure 7.1: Accuracy of Estimates Relating to Project Definition

The accuracy of an estimate depends upon the project definition


and also on the time and efforts spent on its preparation. Figure
7.1 indicates typically the probable accuracy of estimates at each
project definition stage. Moving from left to right the accuracy
increases with project definition.

___________________
___________________
___________________

Project Management & Its Applications

___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________

At stage 0, when the project is still in the initial conceptual phase,


an order of magnitude estimate may have an accuracy of between
30 to 50%.

Notes

At stage 1, when process design has been finalized, a preliminary


or factored estimate from equipment costs may be prepared with
an accuracy of between 15 to 25%.
At stage 2, when basic engineering is complete, i.e. piping and
instrumentation diagrams, plot plans, arrangement studies, etc.
have been completed, a definitive estimate can be prepared with an
accuracy of 10 to 15%.

PE

92

At stage 3, on completion of engineering when final drawings and


bills of materials have been completed and all material has been
purchased, a detailed estimate can be prepared with an accuracy of
5 to 10%.
Stage 4, corresponds to mechanical completion of erection, but even
at this time, the final actual cost of project is not known precisely.

(c

)U

The last stage 5, at financial completion, is when the final actual


cost is known which is when all the bills have been settled. This
may be after several months of mechanical completion.
If the above ranges of accuracy are typical and has been proved by
experience from many projects, then if one can define the stage of
project definition, the likelihood is that the accuracy will fall
somewhere in the shaded area indicated. It follows that an average
contingency within the range should be allowed, depending upon
the specific project.
Figure 7.1 also indicates that the accuracy is related to the
proximity to the completion date. An estimate is more likely to be
accurate if the time to completion is reduced. If there is a long
schedule period, the probability of inaccuracy increases.

Check Your Progress

Fill in the blanks:


1.

The first step in the preparation of fixed capital cost


estimates is to sub-divide the project into its .

2.

At stage , on completion of engineering


when final drawings and bills of materials have been
completed.

UNIT 7: Project Cost and Risk Management

Project Risk Management

93

Notes
Activity
___________________
Write
down the risk factors
in cost estimates of your
___________________
project.
___________________
___________________
___________________

PE

Risk is the potential that a chosen action or activity will lead to a


loss (an undesirable outcome). Potential losses themselves may
also be called "risks". Almost any human endeavour carries some
risk, but some are much more risky than others. Risk marks a
potential negative impact to some characteristic value that may
arise from a future event. Exposure to the consequences of
uncertainty constitutes a risk. In everyday usage, risk is often used
synonymously with the probability of a known loss.
Risk communication and risk perception are essential factors for
all human decision making.
There are many definitions of risk that vary by specific application
and situational context. Risk is described both qualitatively and
quantitatively.

Qualitatively, risk is proportional to both the expected losses


which may be caused by an event and to the probability of the
event. Greater loss and greater event likelihood result in a
greater overall risk.

Quantitatively, there are many formal methods used to assess


or to "measure" risk. Some of the quantitative definitions of
risk are well-grounded in statistics theory and lead naturally
to statistical estimates, but some are more subjective. For
example, in many cases a critical factor is human decision
making.

)U

As a matter of fact, risk is defined in pseudo-formal forms where


the components of the definition are vague and ill-defined. For
example, risk is considered as an indicator of threat, or depends on
threats, vulnerability, impact and uncertainty.

Role of Risk Management in Overall Project Management

(c

Risk Analysis and Management is a process which enables the


analysis and management of the risks associated with a project.
Properly undertaken, it will increase the likelihood of successful
completion of a project to cost, time and performance objectives.
There are a lot of benefits of proper risk management in projects.
Organisations can generate a lot of profit if they deal with
uncertain project events in a proactive manner. You can deliver a
project on time, on budget and with proper quality if you are able

___________________
___________________
___________________
___________________
___________________

Project Management & Its Applications

___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________

A project life cycle includes the key phases like; initiating,


planning, executing controlling and closing. The probability of
project risk depends on the project life cycle. The Figure 7.2
explains the relationship between the risks and their probability of
happening:

(c

)U

___________________

to manage the risks properly. The proper risk management can


increase the productivity and efficiency of project team.

Notes

PE

94

Probability

Figure 7.2: Probability of Risks versus Stages of Project Life Cycle

The above figure explains the probability of risk in different stages


of project life cycle. It shows that the probability of risks in higher
in the initial phases in comparison to closing phases. The
highlighted point shows the maximum probability of risk
happening.
Impact

Figure 7.3: Impact of Risks versus Stages of Project Life Cycle

UNIT 7: Project Cost and Risk Management

In the above Figure 7.3, the highlighted point shows the maximum
impact area of a project life cycle.

95
Notes

In comparison to probability of risk the impact of risks are


opposite. The impact of risks are less in the initial stages of a
project life cycle and higher in the closing phases. The Figure 7.3
explains the impact of risks on various stages of a project life cycle.

___________________
___________________
___________________
___________________

True or False:
1.
2.

The probability of project risk depends on the project


life cycle.
The impact of risks is higher in the initial stages of a
project life cycle.

Summary

)U

Contingency, risk and sensitivity analysis can be applied to any


part of a project cost estimate. The first step in the preparation of
fixed capital cost estimates is to sub-divide the project into its
units or areas. A cost estimate summary is then made up for each
unit or area of the total project by code of accounts, covering
material, labour and subcontracts. A higher level of accuracy may
be expected than is realistic. The accuracy of an estimate depends
upon the project definition and also on the time and efforts spent
on its preparation. Risk communication and risk perception are
essential factors for all human decision making. Risk Analysis and
Management is a process which enables the analysis and
management of the risks associated with a project. A project life
cycle includes the key phases like; initiating, planning, executing,
controlling, and closing.

Lesson End Activity

Critically examine the impact of risks versus stages of project life


cycle.

(c

___________________

PE

Check Your Progress

Keywords

Business Risk: Risk caused by the operating environment of the


business.

___________________
___________________
___________________
___________________
___________________

Project Management & Its Applications

___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________

Project Risk: Risk caused by uncertain events or situations that


can adversely affect a project as planned.

Risk Management: Concerned with identifying all foreseeable


risks reasonably, assessing the probability and severity of the risk
and deciding course of action to reduce their possible impact or
avoid them altogether.
Risk: Defined as probability or chance of occurrence of adverse
effect on projects objectives like cost, time and quality.

Questions for Discussion


1.

Briefly explain about the types of project estimates.

2.

Discuss about fixed capital cost estimation.

3.

What is estimate accuracy?

4.

Explain the risk components in project cost estimates.

5.

Define risk management. What are the different types of risks


that can affect a project?

6.

Discuss the role of risk management in overall project


management.

(c

)U

___________________

Fixed Capital: It refers to any kind of real or physical capital that


is not used up in the production of a product and is contrasted with
circulating capital such as raw materials, operating expenses and
the like.

Notes

PE

96

Further Readings
Books

Clements/Gido, Effective Project Management, Thomson.


Clifford F. Gray and Erik W. Larson, Project Management, Tata
McGraw Hill.
Dennis Lock, Project Management, Ninth Edition, Gower.

K. Nagarajan, Project Management, Third Edition, New Age


International.
Prasanna Chandra, Projects-Planning, Selection, Financing,
Implementation and Review, Sixth Edition, Tata McGraw Hill.

UNIT 7: Project Cost and Risk Management

Vasant Desai, Project Management, Second Revised Edition,


Himalaya Publishing House.

97
Notes

P.C.K. Rao, Project Management and Control, Sultan Chand &


Sons.

___________________
___________________
___________________

Web Readings

___________________
___________________

PE

http://www.rdec.gov.tw/public/attachment/8112510475771.pdf
http://www.reading.ac.uk/web/FILES/innovativeconstructionresear
chcentre/icrc-31-cProjectcostoverrunsandriskmanagementARCOM2002.pdf

___________________
___________________

http://www.wbdg.org/project/riskmanage.php

___________________

http://www.projectrisk.com/white_papers/Project_Cost_Risk_Analy
sis.pdf

___________________

http://www.palisade.com/downloads/pdf/Project_Cost_Risk_Analysi
s_and_Risk_Prioritizaton_using_the_Risk_Driver_Method.pdf

(c

)U

http://www.phe.gov/about/amcg/toolkit/Documents/riskmanagement.pdf

___________________

Project Management & Its Applications

98

Notes
___________________
___________________
___________________

___________________
___________________
___________________
___________________
___________________

(c

)U

___________________

PE

___________________

UNIT 8: Project Cost Contingency

Unit 8

99

Project Cost Contingency

The Need for a Contingency

Method of Determining Contingency

Maximum Risk Contingency

___________________

___________________
___________________

PE

After completion of this unit, the students will be aware of the following
topics:
Contingency Definition

___________________

___________________

Objectives

Notes

___________________
___________________
___________________
___________________

Introduction

)U

When estimating the cost for a project, product or other item or


investment, there is always uncertainty as to the precise content of
all items in the estimate, how work will be performed, what work
conditions will be like when the project is executed and so on.
These uncertainties are risks to the project. Some refer to these
risks as "known-unknowns" because the estimator is aware of
them, and based on past experience, can even estimate their
probable costs. The estimated costs of the known-unknowns are
referred to by cost estimators as cost contingency.
Contingency "refers to costs that will probably occur based on past
experience, but with some uncertainty regarding the amount. The
term is not used as a catchall to cover ignorance. It is poor
engineering and poor philosophy to make second-rate estimates
and then try to satisfy them by using a large contingency account.
The contingency allowance is designed to cover items of cost which
are not known exactly at the time of the estimate but which will
occur on a statistical basis."

(c

The cost contingency which is included in a cost estimate, bid, or


budget may be classified as to its general purpose that is what it is
intended to provide for. For a class 1 construction cost estimate,
usually needed for a bid estimate, the contingency may be
classified as an estimating and contracting contingency. This is
intended to provide compensation for "estimating accuracy based
on quantities assumed or measured, unanticipated market
conditions, scheduling delays and acceleration issues, lack of

___________________

Project Management & Its Applications

___________________
___________________
___________________
___________________
___________________
___________________
___________________

Contingency Definition

There are three basic types of contingencies in projects: tolerance


in the specification, float in the schedule, and money in the budget.
There is no standard definition for contingency as Patrascu
(1988:115) observes, "Contingency is probably the most
misunderstood, misinterpreted and misapplied word in project
execution. Contingency can and does mean different things to
different people". Contingency has been defined as the amount of
money or time needed above the estimate to reduce the risk of
overruns of project objectives to a level acceptable to the
organization
Some authors distinguish between contingency, allowance and
management reserve. Allowance is for specific, known but
undefined items. Management reserve is a provision held by the
project sponsor for possible changes in project scope and quality.
The management reserve should also be expected to cater for
extraordinary, unforeseen external risks, e.g. currency-exchange
fluctuation, force majeure.

(c

)U

___________________

bidding competition, subcontractor defaults, and interfacing


omissions between various work categories." Additional
classifications of contingency may be included at various stages of
a project's life, including design contingency, or design definition
contingency, or design growth contingency, and change order
contingency (although these may be more properly called
allowances).

Notes
Activity
___________________
Write
a short note on
Contingency concept.
___________________

PE

100

Contingency caters for two categories of risk known unknowns


and unknown unknowns. Known unknowns are risks that have
been identified, analysed and it may be possible to plan for them.
They are identifiable sources of uncertainty. Unknown unknowns
cannot be managed although they may be addressed them by
applying a general contingency based on past experience with
similar projects. So a contingency should be set up to allow for
residual unidentified risks not revealed during the risk
identification process. Unknown unknowns cannot be anticipated
and therefore are not manageable and the realisation of some of
them is usually inevitable but they exclude risks like the world
may end tomorrow.
It is not only important to understand the factors covered by
contingency but also those factors that it is not intended for: Scope

UNIT 8: Project Cost Contingency

101

Notes

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___________________
___________________
___________________
___________________

PE

changes. Scope changes occur when what is now expected is


materially different from what was previously reasonably
expected. Contingency does cover for cost created by scope
development i.e. scope remains constant even as the product
characteristics are progressively elaborated; Escalation, which is
usually shown as a separate item within the project budget;
unforeseeable major events such as extreme weather, earthquakes,
riots, acts of war new government regulations, and economic
collapse.

___________________

Check Your Progress


Fill in the blanks:
1.
2.

There are basic types of contingencies


in projects.
are risks that have been identified,
analysed and it may be possible to plan for them. They
are identifiable sources of uncertainty.

)U

The Need for a Contingency

Regardless of the time and effort spent in preparation of an


estimate, there is always the possibility of errors due to:
z

Engineering errors and omissions

Cost and rate changes

Construction problems

Schedule slippages

Miscellaneous unforeseen

Estimating inaccuracies

(c

During the preparation of the estimate, each item is cost by


estimating the man-hours or material content and applying a cost
rate. At the preliminary estimate stage, the material content is not
completely defined. An allowance is thus required which recognizes
that the final material quantity will exceed the initial quantity.
This is covered by a design margin applied to the equipment and
bulk material categories and is an integral part of the estimate.
Design margins are not part of the contingency.
The contingency is required to cover those events which could
occur during progress of any normal project. Complete coverage to

___________________
___________________
___________________
___________________

Project Management & Its Applications

___________________
___________________
___________________
___________________
___________________

cover worst possibilities could require a significant contingency for


each code of accounts. The sum of these contingencies will give a
very large overall contingency for the total project.

Notes
Activity
___________________
Prepare
a
contingency
worksheet of your project in
line___________________
with Table 8.1.

The probability that things will go wrong on all accounts is


unlikely. Therefore, the overall contingency does not need to be the
sum of the maximum individual contingencies. It is an average
contingency that should be adequate if it is assumed that not all
things will go wrong and some things may go better than planned.
The practice, therefore, is to determine average contingency for
each account. This is totalled and kept as a separate overall
contingency, available to the project as a whole.

___________________

Check Your Progress

___________________
___________________

PE

102

Fill in the blanks:


1.
2.

An is required which recognizes that the


final material quantity will exceed the initial quantity.
The overall contingency does not need to be the sum of
the individual contingencies.

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Method of Determining Contingency

The method of arriving at a reasonable contingency requires


judgment. So, it is desirable that a consistent logical procedure be
used in its development. The procedure should separate what may
be termed "average contingency" and the "maximum risk
contingency," which would be the contingency required to cover the
worst case.
Average contingency is determined by examining the project
definition stage for each code of accounts and applying average
estimating accuracy factors appropriate for the specific project. The
maximum risk contingency is determined by examining problem
areas in each code of accounts.
The average accuracy ranges are taken for each stage of definition.
The probable accuracy selected for a specific project will be within
the ranges for each stage. Whether the Figure selected will be at
the top or bottom end of the range will be determined by the
variables and unknowns for the specific project.
For example, a Gulf Coast project for a conventional process unit
would be at the lower end of the range, while a non-standard

UNIT 8: Project Cost Contingency

Typical
Accuracy
Range
+or -

Accuracy
Range Selected
for Specific
Project

25 to 50

30

15 to 25

20

10 to15

13

Initial concept prior to finalization


of process design

Process design finalized with


equipment but not quoted. Bulk
material factored but un-priced

Completion of basic engineering,


mechanical flow sheets, P & Ids,
plot plans approved, equipment
quoted and preliminary take-offs for
bulk materials quoted

Engineering and design complete


with final quantities take off. Orders
placed for tools, equipment &
materials

5 to 10

Mechanical erection complete

0 to 5

Financial completion

___________________

Normal
Contingency, $

% Normal
Contingency

% at stage 5

% at stage 4

% at stage 3

% at stage 2

% at stage 1

% at stage 0

% of Total Cost

(c

Forecast Value, $

Table 8.2: Contingency Worksheet Form

Description

___________________
___________________

To evaluate the average contingency, a standard worksheet form is


used as shown in Table 8.2.

Account No.

___________________

___________________

)U

___________________

PE

Project Definition

Notes
Activity
___________________
Establish
overall average
contingency for your project
by ___________________
using the contingency
sheet prepared earlier.
___________________
___________________

Table 8.1: Basis for Average Contingency


Stage
Number

103

process unit at an overseas site would be at the upper end of the


range. Process unknowns, sources of engineering, procurement and
construction, the schedule period, market and economic factors
could all influence the selection of the probable accuracy for the
specific project. Following this evaluation, a chart as shown in
Table 8.1 is drawn up for the specific project being evaluated.

Project Management & Its Applications

___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________

Column 3 shows the current estimate value or most recent forecast


value in dollars.
Column 4 expresses the value in column 3 as a percentage of the
estimate total. This is used for sensitivity analysis.

Column 5 through 10 indicates the percentage of column 3 that has


been defined through to the stage indicated. For example, if the
project is in the initial conceptual stage, then it will show 100%
under stage 0. If the account has passed through the definitive
estimate stage and 50% has been purchased, then 50% would be at
stage 2 and 50% at stage 3.
The object is to identify the degree of definition for the account by
allocating the total 100% in the appropriate columns from stage 0
to stage 5. This allocation need not be too precise. It can be
performed on an approximate judgment basis. It is of particular
value if the project estimate is reviewed at periodic intervals and
contingency re-evaluated as the project definition improves. In
such a case, the percentages will tend to move through from stage
0 through to stage 5.

(c

)U

___________________

Columns 1 & 2 on the left hand side of the form contain a list of
the equipment and bulk materials by code of accounts. The form
may be subdivided under material, subcontracts and labour in a
similar manner to the way in which the unit estimate is built up.

Notes

PE

104

Column 11, the average contingency percentage for the account, is


evaluated using Table 8.1 which has established a probable
accuracy and hence, an average contingency, for each project
definition stage. The percent average contingency in column 11 for
the account number is a simple calculation of multiplying the
percentage in each stage by the average contingency for the stage.
Per cent Stage 0 x 0.30

Plus per cent Stage 1 x 0.20


Plus per cent Stage 2 x 0.13
Plus per cent Stage 3 x 0.08
Plus per cent Stage 4 x 0.04

Equals per cent average contingency


Column 12 is obtained by multiplying the value in column 3 by the
average per cent contingency evaluated in column 11 to give a
dollar value. The overall average contingency required for the
project is determined by totalling column 12 for all accounts.

UNIT 8: Project Cost Contingency

105

Fill in the blanks:


1.

contingency is determined by examining


the project definition stage for each code of accounts.

2.

expresses the value in column 3 as a


percentage of the estimate total.

Notes
Activity
___________________
Using
average and maximum
contingency for each account,
___________________
establish
potential areas of
high sensitivity and impact of
any ___________________
specific cost changes for
your project.
___________________

Check Your Progress

PE

___________________

Maximum Risk Contingency

___________________

After the evaluation of average contingency for each account, it is


necessary to carry out a further evaluation to determine the
maximum possible risk for each account and for total project. Each
individual account should be considered for any specific unknowns
or potential problems which might occur in this account. In this
evaluation, the percentage schedule completion of the project
should be considered. Particular areas of risk which might affect
the account are shown below.

)U

In each case the maximum risk contingency is evaluated by


identifying and evaluating the risk, firstly by each individual code
of account and then overall. Again it is unlikely that all the risks
will occur for all accounts. The normal procedure is to identify the
major items of risk and to assess the maximum cost impact of the
risk. The next step is to attempt to assess the percentage
probability that this risk will occur. The net risk then becomes the
multiple of the maximum cost of the risk times the probability. The
sum of all the net risks for each of the risk possibilities gives the
total maximum risk contingency required.
Risk - Areas

Equipment Failures
Subcontractors Poor Performance
Supplier's Claims
Damages and Losses
Schedule Completion Formalities
Operating Performance Penalties

Item of Risk

Probability of
Risk Occurrence

(c

Labour Disputes and Shortages


High Labour Wage Settlement
Inclement Weather
Low Productivity
Late Deliveries
Material Shortages

Maximum Extra
Cost due to Risk

Net Risk to
Project

___________________
___________________
___________________
___________________

Project Management & Its Applications

___________________
___________________
___________________
___________________
___________________
___________________

Two separate analyses have now been performed an average


contingency evaluation and a maximum risk contingency
evaluation. Again an overall contingency put into an estimate need
not necessarily be the sum of these two. It requires judgment to
assess which number is a reasonable contingency to apply against
the estimates. It may be policy to include the two contingencies as
separate items, i.e. including the average contingency as part of
the estimates and maintain a maximum risk contingency as a
separate fund to offset any major risk items that have been
identified.

Notes

___________________

PE

106

Check Your Progress

___________________
___________________

Fill in the blanks:

___________________

1.
2.

The risk becomes the multiple of the


maximum cost of the risk times the probability.
Each account should be considered for
any specific unknowns or potential problems which
might occur in this account.

(c

)U

Summary

This unit provides an insight into various risk factors affecting


project cost estimates. Concepts of average and maximum risk
contingency have been elaborated thus providing scientific basis
for contingency in project cost estimates

Lesson End Activity


Critically examine and estimate the contingencies in the project
cost.

Keywords

Average Contingency: It is determined by examining the project


definition stage for each code of accounts and applying average
estimating accuracy factors appropriate for the specific project.
Contingency: It refers to costs that will probably occur based on
past experience, but with some uncertainty regarding the amount.
Cost Contingency: The cost contingency which is included in a
cost estimate, bid, or budget may be classified as to its general
purpose that is what it is intended to provide for.

UNIT 8: Project Cost Contingency

Unknown Unknowns: These cannot be managed although they


may be addressed them by applying a general contingency based
on past experience with similar projects.

107
Notes

Known Unknowns: They are risks that have been identified,


analysed and it may be possible to plan for them. They are
identifiable sources of uncertainty.

___________________
___________________
___________________
___________________

1.

What are various types of estimates involved in a project?

2.

How to provide contingency in various categories of estimates?

3.

Explain why the accuracy of cost estimates changes with the


project stage at which these are made. List out factors those
will help in arriving at accurate project estimates right at the
initiation stage.

4.

What are the factors that govern choice between average and
maximum risk contingency to be applied to a particular project
at a particular location?

Books

)U

Further Readings

Clements/Gido, Effective Project Management, Thomson.


Clifford F. Gray and Erik W. Larson, Project Management, Tata
McGraw Hill.
Dennis Lock, Project Management, Ninth Edition, Gower.
K. Nagarajan, Project Management, Third Edition, New Age
International.
Prasanna Chandra, Projects-Planning, Selection, Financing,
Implementation and Review, Sixth Edition, Tata McGraw Hill.
P.C.K. Rao, Project Management and Control, Sultan Chand &
Sons.

(c

___________________

PE

Questions for Discussion

Vasant Desai, Project Management, Second Revised Edition,


Himalaya Publishing House.

___________________
___________________
___________________
___________________
___________________

Project Management & Its Applications

Notes
___________________
___________________
___________________
___________________

Web Readings

108

http://www.dummies.com/how-to/content/how-to-estimate-projectcosts.html

http://www.brookings.edu/about/projects/archive/nucweapons/man
hattan

___________________

http://www.villanovau.com/project-cost-management-strategies/

___________________

http://docs.oracle.com/cd/A60725_05/html/comnls/us/cst/trnspr01.ht
m

___________________
___________________

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)U

___________________

PE

___________________

http://www.pmh1project.com/info-centre/faq/Pages/Project-CostTiming.aspx

UNIT 9: Sensitivity Analysis

Unit 9

109

Sensitivity Analysis

Notes
Activity
___________________
Prepare
an assignment on
application
of
Sensitivity
___________________
Analysis
in your project.
___________________

Objectives

___________________
___________________

PE

After completion of this unit, the students will be aware of the following
topics:
\

Concept of Sensitivity Analysis in Project Management

___________________

Judgment Factor

___________________

Settings and Constraints

Introduction

)U

Sensitivity analysis examines each project risk on its own merit.


All other risks in the project are set at a baseline value. The
individual risk then is examined to see how it may affect the
success of the project. The goal of sensitivity analysis is to
determine which individual risks have the greatest impact on the
projects success and then to escalate the risk management
processes on these risk events.

(c

Having carried out the contingency and risk analysis, the last step
is to do a sensitivity analysis. The term may be interpreted in
many ways. But in general, the requirement is to determine cost
areas which could change significantly and which, in turn, would
have the greatest impact on the overall project cost which will be
more sensitive to changes in some accounts than others. For
example, if one account represents 1% of the total cost, then a
100% overrun in this account will only affect the total by a
maximum of 1%. On the other hand, if another account represents
20% of the total cost, then a 10% overrun on this account could
affect the total cost by 2%. Thus the total cost has greater
sensitivity to this account than the first.

Concept of Sensitivity Analysis in Project


Management
Sensitivity Analysis is an assessment process that compares the
expected results with the possible results. Lets say for example;
when an analyst calculates the NPV of a project, what would
happen if the assumed net sales are over or under estimated by

___________________
___________________
___________________

Project Management & Its Applications

___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________

If the range is greater, it is generally considered more risky than a


project with a narrower range and all other variables constant.
It also reveals if the project is heavily depended on a certain
variable. If the NPV is very sensitive to a certain variable the
manager might be interested in greater analysis of that particular
variable.

As the project proceeds, so sensitivities will change as some of the


accounts become firm and committed. Sensitive areas will be those
accounts which still have the largest dollar values yet
uncommitted and which require the largest contingency.
The analysis of average and maximum risk contingency provides
an effective means of establishing sensitivity. A quick review of the
required average contingency and maximum risk contingency
against each of the account codes will indicate rapidly the potential
areas with high sensitivity i.e. the cost accounts which may have
the maximum effect on the total cost forecast both in the areas of
overruns and potential cost savings. It is, therefore, a valuable
exercise to identify the highly sensitive areas. Following on from
this, one may introduce some additional surveillance with checks
and balances in these areas to attempt to minimize the potential
overrun and maximize the potential for reducing the overall project
cost.

(c

)U

___________________

15%? This helps managers identify how risky a certain project is


depending on the range of possible outcomes.

Notes

PE

110

Having performed a review of each account for average and


maximum contingency to identify potential areas of high
sensitivity, the next step is to identify the impact of any specific
cost changes. For example, changes in labour productivity, changes
in wage rates or extension to the project schedule. For specific
risks of this type, sensitivity covers can be constructed to show the
impact of these cost changes.
Figure 9.1 illustrates two types of such curves. The first shows the
effect on labour cost of changing labour productivity combined with
the changes in the labour cost rates. As can be seen, the total
labour cost is extremely sensitive to reduction in labour
productivity, more so than increase in labour rate.
The second chart shows the effect of increased schedule time
on project cost. It shows, for example, that the effect on project
costs may be significantly increased due to changes in labour rates

UNIT 9: Sensitivity Analysis

111
Notes

and possible labour productivity due to running into winter (rainy)


working conditions, etc.

___________________

Judgment Factor

___________________
___________________
___________________
___________________

PE

The areas of contingency, risk and sensitivity analysis are


interrelated. The subject provides a fertile area for
mathematicians, statisticians and other analytical types with
computers. At the same time, it is also apparent that no matter
how refined a system is applied, both the basic input data and the
final assessment depends heavily upon judgment.

___________________
___________________
___________________
___________________

)U

___________________

Figure 9.1: Sensitivity Curves

(c

Check Your Progress

Fill in the blanks:


1.

The goal of sensitivity analysis is to determine


.

2.

If the range is , it is generally considered


more risky than a project with a narrower range and all
other variables constant.

Project Management & Its Applications

___________________

Settings and Constraints

Notes
Activity
___________________
Prepare
a report on settings
and constraints of your
___________________
project.

The choice of method of sensitivity analysis is typically dictated by


a number of problem constraints or settings. Some of the most
common are:
z

___________________
___________________
___________________

Computational Expense: Sensitivity analysis is almost


always performed by running the model a (possibly large)
number of times, i.e. a sampling-based approach. This can be a
significant problem when,

___________________
___________________
___________________

___________________

PE

112

A single run of the model takes a significant amount of


time (minutes, hours or longer). This is not unusual with
very complex models.
The model has a large number of uncertain inputs.
Sensitivity analysis is essentially the exploration of the
multidimensional input space, which grows exponentially
in size with the number of inputs. See the curse of
dimensionality.

(c

)U

Computational expense is a problem in many practical


sensitivity analyses. Some methods of reducing computational
expense include the use of emulators (for large models), and
screening methods (for reducing the dimensionality of the
problem).

Correlated Inputs: Most common sensitivity analysis


methods assume independence between model inputs, but
sometimes inputs can be strongly correlated. This is still an
immature field of research and definitive methods have yet to
be established.

Non-linearity: Some sensitivity analysis approaches, such as


those based on linear regression, can inaccurately measure
sensitivity when the model response is non-linear with respect
to its inputs. In such cases, variance-based measures are more
appropriate.

Model Interactions: Interactions occur when the


perturbation of two or more inputs simultaneously causes
variation in the output greater than that of varying each of the
inputs alone. Such interactions are present in any model that
is non-additive, but will be neglected by methods such as
scatterplots and one-at-a-time perturbations. The effect of
interactions can be measured by the total-order sensitivity
index.

UNIT 9: Sensitivity Analysis

Given Data: While in many cases the practitioner has access


to the model, in some instances a sensitivity analysis must be
performed with "given data", i.e. where the sample points (the
values of the model inputs for each run) cannot be chosen by
the analyst. This may occur when a sensitivity analysis has
to perform retrospectively, perhaps using data from an
optimisation or uncertainty analysis, or when data comes from
a discrete source.

Check Your Progress


True or False:

A single run of the model takes a significant amount of


time.

2.

Computational expense is a problem in many practical


sensitivity analyses.

)U

1.

Summary

Sensitivity analysis examines each project risk on its own merit.


All other risks in the project are set at a baseline value. The
individual risk then is examined to see how it may affect the
success of the project. Sensitivity Analysis is an assessment
process that compares the expected results with the possible
results. The areas of contingency, risk and sensitivity analysis
are interrelated. The subject provides a fertile area for
mathematicians, statisticians and other analytical types with
computers. The choice of method of sensitivity analysis is typically
dictated by a number of problem constraints or settings.
Computational expense is a problem in many practical sensitivity
analyses. Some methods of reducing computational expense
include the use of emulators (for large models), and screening
methods (for reducing the dimensionality of the problem).

(c

113
Notes

Multiple Outputs: Virtually all sensitivity analysis methods


consider a single univariate model output, yet many models
output a large number of possibly spatially or time-dependent
data. Note that this does not preclude the possibility of
performing different sensitivity analyses for each output of
interest. However, for models in which the outputs are
correlated, the sensitivity measures can be hard to interpret.

___________________
___________________
___________________
___________________
___________________

PE

___________________
___________________
___________________
___________________
___________________

Project Management & Its Applications

Notes
___________________

Lesson End Activity


Establish estimate accuracy of each sub-division of your project
and of the total project.

___________________

___________________
___________________
___________________
___________________
___________________
___________________
___________________

Keywords

Constraints: Constraint is the element factor or a subsystem that


works as a bottleneck.

PE

___________________

114

Correlation: Correlation is a measure of


relationship between two comparable time series.

the

statistical

Non-linearity: Non-linearity is the behaviour of a circuit,


particularly an amplifier, in which the output signal strength does
not vary in direct proportion to the input signal strength.
Sensitivity Analysis: Sensitivity Analysis is an assessment
process that compares the expected results with the possible
results.

Questions for Discussion

Describe meaning of sensitivity analysis.

2.

Explain the applicability of sensitivity analysis for developing


new projects.

3.

Explain the concepts of risk and sensitivity analysis in project


cost estimates.

4.

The analysis of average and maximum risk contingency


provides an effective means of establishing sensitivity.
Elaborate.

(c

)U

1.

Further Readings
Books

Clements/Gido, Effective Project Management, Thomson.


Clifford F. Gray and Erik W. Larson, Project Management, Tata
McGraw Hill.
Dennis Lock, Project Management, Ninth Edition, Gower.

K. Nagarajan, Project Management, Third Edition, New Age


International.

UNIT 9: Sensitivity Analysis

P.C.K. Rao, Project Management and Control, Sultan Chand &


Sons.

Web Readings

Notes

___________________
___________________
___________________
___________________
___________________

PE

Vasant Desai, Project Management, Second Revised Edition,


Himalaya Publishing House.

115

Prasanna Chandra, Projects-Planning, Selection, Financing,


Implementation and Review, Sixth Edition, Tata McGraw Hill.

http://www.euroi.ktu.lt/lt/images/stories/Paskaitos/ch11.pdf

___________________

http://www.wageningenur.nl/en/show/validation-of-complexadaptive-systems-1.htm

___________________

http://www.biztek.edu.pk/downloads/JICT%204.1/4%20Project%20
Management.pdf

___________________

(c

)U

http://archive.nbuv.gov.ua/portal/Soc_Gum/Evd/2011_4/32.pdf

___________________

___________________

Project Management & Its Applications

116

Notes
___________________
___________________
___________________

___________________
___________________
___________________
___________________
___________________

(c

)U

___________________

PE

___________________

UNIT 10: Case Study

Unit 10

117

Case Study

___________________
___________________
___________________

Objectives

___________________
___________________

)U

For more than a decade, K.Yegna Narayana, Director of the light


transport aircraft (LTA) project at the National Aerospace
Laboratories (NAL) in Bangalore had little else than thinking,
talking about and working on his project. At NAL hangar near his
office, the aircraft is getting finishing touches. The 14-seater LTA,
now named Saras and looking impressively big near tiny twoseaters designed and made by NAL, is set to roll out on 4th
February. It will fly by the end of June. Saras is the first civilian
aircraft to be designed and manufactured completely in India.
India is entering the civil aircraft industry this year. India
contributes 0.1% to the world aircraft manufacturing market of
$350 billion. Saras is the first serious attempt to address this
anomaly.

The project was conceived by Roddam Narsimha, who was the


director of NAL in 80s and early 90s. Narsimha had decided that
NAL needed to design aircraft and not just do research. The first
attempt was an assembly: the experimental light canard aircraft.
NAL then designed the two-seater Hansa, the only all-composite
two-seater in the world. Hansa got certified in 2000. Even while
the Hansa work was in progress, NAL decided to make Saras. The
first feasibility study was done in 1989. Russias Myasischev
Design Bureau was a partner. But Saras got stuck due to lack of
funding. The Russians pulled out due to economic difficulties. By
the end of 90s, it seemed that Saras would never be developed. In
1999, the Department of Science and Technologys technology
development board (TDB) agreed to help. TDB sanctioned a grant
of ` 65 crore for the development of Saras. The estimated
development cost was ` 132 crore. The Council of Scientific and
Industrial Research, of which NAL is a part, put in ` 52 crore.
Hindustan Aeronautics (HAL) and the ministry of Civil Aviation
put in ` 9 crore and ` 5 crore respectively. The project got
underway by end-1999, 10 years after the feasibility study.

(c

___________________

PE

After analyzing this case, the student will have an appreciation of the
concept of topics studied in this Block.

Case Study: Saras

Notes

A number of companies worked on the project. HAL designed and


developed the landing gear, electrical systems and few other
parts. Taneja aerospace made most of the sheet metal parts. NAL
did the design and development, structural and qualification
testing and the project management. The Central Mechanical
Engineering and Research Institute, Durgapur, developed the
throttle control box. About 20 firms in Bangalore did the machine
Contd...

___________________
___________________
___________________
___________________

Project Management & Its Applications

___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________

tooling. To reduce development costs, developers used off-the-shelf


components as much as possible. T.S. Prahlad, who was NALs
director till recently, says, Saras is specially designed for Indian
conditions. It can take off from short run ways, in hot conditions
and on high altitudes. It can fly in any kind of weather. Indias
feeder airline services are poorly developed; even existing services
like Vayudoot have stopped operations. Other than poor
management, two major problems have been lack of cheap Indian
aircraft and poor economies of scale for maintenance. Saras could
solve both. NAL now estimates an Indian market of 200 planes in
the next 10 years.

Notes

PE

118

The aircraft industry has a considerable influence on the economy


of a country. The economic impact of aviation on the worlds GDP
is about 10%. After Saras, the next civil aircraft project is the
100-seater from HAL. Can these two projects Kick start an
aircraft industry in the country?

___________________

Question:

___________________

Analyse the case and write down the case facts of your study.

(c

)U

Source: http://www.scribd.com/doc/6929735/Project-Management0406

UNIT 11: Initiating a Project

119

Notes

___________________
___________________
___________________
___________________

PE

___________________
___________________
___________________
___________________
___________________
___________________

(c

)U

BLOCK-III

120

Notes

Project Management & Its Applications

UNIT
11: INITIATING A PROJECT
___________________
z
Introduction
___________________
z
Manpower Build-up
___________________
z
Project Initiation Steps

___________________
Project Managers and Project Team
Responsibilities
___________________
Issue of Network, Work to List and Work Order
Form
___________________
___________________

Introduction

A Sample Project

Major Elements

The Total Project

UNIT 14: PERT AND CPM TECHNIQUES


z

Introduction

Development of Project Network

Time Estimation

Determination of the Critical Path

PERT Model

CPM Model

UNIT 15: CASE STUDY

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UNIT 13: DEVELOPING A PROJECT SCHEDULE

PE

___________________
UNIT 12: PROJECT EXECUTION
___________________
z
Introduction
___________________
z
Meaning of Project Execution

Detailed Contents

UNIT 11: Initiating a Project

Unit 11

121

Initiating a Project

___________________

Objectives

Manpower Build-up

Project Initiation Steps

___________________
___________________

PE

After completion of this unit, the students will be aware of the following
topics:
\

Notes
Activity
___________________
Make
a list of the major
initiation steps for your
___________________
project.

___________________
___________________
___________________

Introduction

A new project is "initiated" when owner and contractor enter into a


contract or agree to start work with "letter of intent" while the
contract is being finalized. From the contractor's viewpoint, the
owner has now become the "client".

Manpower Build-up

)U

In order to build a plant, an Engineering & Construction (E&C)


contractor must spend money at the proper rate to meet the
required completion schedule. Money translates to man-hours
whether it is home office engineering hours, manufacturing hours
or field construction hours. To achieve progress, man-hours must
be spent. On a project where short schedule is of prime importance,
calendar time can be saved by selecting designs already completed,
standard equipment already fabricated, or material in stock. Even
when these methods are used, there are still a large number of
hours in engineering, manufacturing and construction which must
be expended during the project execution.

(c

The E&C must achieve a rapid mobilization and smooth


application of manpower, without flat periods, fluctuations, or
excessive peaks, which will match the project budget and schedule.
This is where the skill of E&C plays an important part. Figure 11.1
shows the relationship between home office, manufacturing and
construction man-hours. The solid curves show the desired rate of
mobilization and build-up with rapid spread of work through
manufacturing and construction giving optimum peak manpower
application consistent with the needs of the project schedule.
The dotted curves show the impact if early engineering is delayed.

___________________
___________________

Project Management & Its Applications

___________________
___________________
___________________
___________________
___________________

This results in steeper mobilization curves in manufacturing and


construction with higher man-power peaks which, in turn, lead to
inefficiency and greater cost.

Notes
Activity
___________________
Prepare
a
preliminary
construction plan for your
___________________
project.

Figure 11.1 illustrates the importance of a fast engineering start.


Every man-hour below the optimum curve during the early
engineering phase may add four to five times these hours to the
peak during the manufacturing and construction phases if the
scheduled end date is to be met. Conversely, overstaffing in the
early phases ahead of date development will also lead to inefficient
man-hour utilization.

PE

122

___________________
___________________

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___________________

Figure 11.1: Man-hour Curves for Engineering, Manufacturing


and Construction

Check Your Progress

Fill in the blanks:


1.

translates to man-hours whether it


is home office engineering hours, manufacturing hours
or field construction hours.

2.

in the early phases ahead of date


development will also lead to inefficient man-hour
utilization.

Project Initiation Steps


As soon as a project has been awarded, a Project Manager (PM)
begins a race against time as the leader of a team, when the team,

UNIT 11: Initiating a Project

Box 11.1: Project Initiation Steps


1.

Review Pre-contract Documentation

2.

Establish Client Communication Channels

3.

Hold Client Kick-off Meeting

4.

Establish Project Procedures

5.

Prepare Project Plan

6.

Establish Project Organization

7.

Hold Project Kick-off Meeting

8.

Issue Project Design Data

9.

Initiate Process Design

10. Prepare Project Coordination Procedure


11. Analyze Preliminary Project Estimates
12. Issue Preliminary Project Schedule
13. Review Engineering Plan

)U

14. Review Procurement Plan

15. Review Construction Plan

Review Pre-contract Documents

Prior to the project award, the E&C would probably have


submitted technical and commercial proposals. PM's job of
initiating a project may be easier if the proposal period has been
fairly extensive and the E&C has spent a considerable time and
effort in preparing detailed technical and commercial proposals.
At the time of award, the scope of the project may have changed
from the enquiry document. The proposal may have been modified,
added to or adjusted by a series of letters or clarification meetings
held prior to the award. It is essential that PM carefully check
through all of the proposal documentation and assemble a
complete file of proposal documents, letters, telexes, telephone and
meeting notes. He thus has a complete record of what was
requested, what was offered and what was accepted in the award.

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Notes

___________________
___________________
___________________
___________________
___________________

PE

These steps do not necessarily occur sequentially. Several may


occur in parallel.

123

the rules and the course may yet have to be defined. The initiation
of a project puts great pressure on him to get the project moving.
Box 11.1 lists the steps in the initiation of a project. The list is not
comprehensive but shows the more important activities of a project
manager.

Following this, the PM will hold a meeting with the


sales/commercial manager to review the proposal documents and
to discuss any additional points discussed during the meetings

___________________
___________________
___________________
___________________
___________________

Project Management & Its Applications

___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________

To ensure continuity and a smooth job start, the E&C will want to
involve the nominated PM and the key members of the proposed
project team in the proposal activities and pre-award contract
discussions.

Establish Client Communication Channels

If a PM is to maintain control over the project, he must establish


with the client that he is the official communication channel
between the E&C and the client for all major aspects of the project.
During the proposal stage, contacts with the client may have been
many and varied from commercial, project and process
engineering, legal, financial and others. Client may have become
used to dealing with multiple people and expect to continue to do
so.
PM has to take over the scene delicately but firmly both with the
client and within his own organization. This ensures that all future
communications are channelled through him so that he can
maintain control. He will recommend to the client that similar
arrangement is followed in client's organization. A client PM
should be appointed through whom all major communications are
channelled. This does not mean that there is no communication or
direct contact between other members of the client and contractor's
organization. It does mean that any such contacts/communications
are either in the presence of PM or with his prior knowledge and
that the subject matter is properly recorded and approved by the
PM.

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___________________

with the client. PM will particularly want to be informed of any


client concerns, preferences or priorities.

Notes

PE

124

Client Kick-off Meeting


As soon as possible, after project award, PM should hold a kick-off
meeting with the client and go through a check list to make sure
that there is total agreement between the contractor and client
with regard to the project requirements. If there has been a
detailed proposal, then it may be a simple matter of confirming
that data in the proposal stand unchanged for the project. It is
rare, however, that the proposal is totally definitive in all areas.
Normally the meeting agenda and check list covers:
z

Scope of work and services

Basis for process design

UNIT 11: Initiating a Project

Project design data

Engineering

Procurement

Construction

Administration procedures (approvals,


documentation, distribution, commercial).

125

___________________
___________________

controls,

reports,

___________________

PE

___________________

A comprehensive project procedure is necessary for effective project


management. This procedure makes it possible to organize and
control the project in a systematic manner using the instructions to
identify and refer technical, planning, reporting, accounting and
administrative documents produced throughout engineering,
procurement and construction.
An E&C company normally has standard procedures covering
equipment, materials and services which must then be adapted
to suit the specific project. The basic areas to which project
numbering system and procedures are applied are:
Tagging and identification of equipment and materials;

Numbering of technical documents, specifications, data sheets,


drawings, requisitions and purchase orders;

Procurement commodity codes;

Scheduling activities
construction;

Estimating equipment, materials and services;

Recording man-hours on timesheets in the home office and


field;

Recording project scope changes;

Project accounting and invoicing;

Project cost and progress reporting;

Project document management.

)U

in

___________________

___________________

Establish Project Procedures

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Notes

engineering,

procurement

and

In addition, a large project must be subdivided into its various


units, areas and plant elements to facilitate control and reporting.
Too great a degree of subdivision merely adds to work and
confusion. The best solution is to have the minimum number of

___________________
___________________
___________________
___________________

Project Management & Its Applications

___________________

sub-project numbers which will give reasonable control. On a


major multi-unit project, the following breakdown is recommended:
z

Overall project number for summary cost reports and


common/bulk requirements;

Individual sub-project numbers for each major identifiable


process unit within the complex;

One or more sub-project numbers for off-site systems,


depending upon size and scale;

Separate sub-project numbers for geographically distinct


locations such as marine terminal, remote road or rail loading
or dispatching stations etc.

___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________

Notes

PE

126

Prepare Project Plan

On completion of the above steps, PM should prepare a project


plan. This plan defines the project objectives, priorities and
philosophies. Its preparation fulfils a number of functions:
It requires that the PM, as leader of the project, takes the time
to access the project needs at an early date and present his
intended plan of execution. Individual communications or
meetings are no substitute for the written plan.

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It provides a basic reference and briefing document for those


who will ultimately be involved in project execution.

It allows the E&C management to review the plan, provide


guidance and assistance and, thereafter, support the plan
throughout project execution.

The project plan will normally include background data; scope of


work and services by E&C and client; split of work with others
(process licensors, other contractors); basis of contract (liabilities,
guarantees); regulatory and other approvals; project identification
and procedures; dimensions, units, language; client participation,
reviews and approvals; specific project needs and highlights;
project design philosophies; and project schedule criticalities,
project control procedures and reports. In addition, the project plan
will contain separate sections dealing with engineering,
procurement, construction, operation and financial as appropriate.
Once project team members are assigned from their functional
departments, they become project oriented, reporting to the PM for
their project execution functions. They continue to report to their

UNIT 11: Initiating a Project

Hold Project Kick-off Meeting

At an appropriate time, when the project scope has been properly


defined, the PM should call a kick-off meeting. This meeting
should be attended by E&C management, the commercial
manager, the functional department managers, and the key staff
selected for the project team.

)U

The commercial manager presents the events leading to the project


award. He highlights the key points that were raised in the preaward discussions and contract negotiations and identifies
outstanding items requiring immediate attention. PM then reviews
the project plan, recapitulates the objectives, priorities and
philosophies and establishes the team spirit necessary for the
successful execution of the project.

Issue Project Design Data

PM arranges for the completion of project design data. The form


covers the subjects listed below and are developed by the project,
process and design engineers. The form, when completed, is
approved by the client and becomes the basis for engineering
specifications and engineering design work.
z

Feedstock and other data

Product data and specifications

Utility, auxiliary and chemical systems

Electrical systems

Waste disposal and environmental requirements

Climatic conditions

Site access and geographical data

Soil investigation data

Water supply data

General project design data

(c

127

Notes

___________________
___________________
___________________
___________________
___________________

PE

department heads with regard to quality, standards and methods.


This ensures that there is a two-way control or a system of checks
and balances during project execution. The PM is totally concerned
with and dedicated for the execution of the project. The
departmental managers are responsible for ensuring that quality
and methods are compatible with the schedule and cost objectives
established in the project plan.

___________________
___________________
___________________
___________________
___________________

Project Management & Its Applications

Notes

Permits and approvals required

Applicable design codes and standards

___________________

___________________
___________________
___________________
___________________
___________________
___________________

Initiate Process Design

Before engineering, procurement and construction commences, it is


essential that process design is completed. The overall schedule is
very much dependent on the speed, accuracy and completeness of
the process design. Hence, this activity must be started as soon as
possible. Process design is normally started at the time of the
project award and proceeds in parallel with the other project
initiating activities. The process design package consists of the
following:

___________________

PE

___________________

128

Process flow diagrams;

Process material balances;

Process specifications and load sheets for equipment items;

Utility system concept and balance diagrams;

Environmental system concepts and balance diagrams.

___________________

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The above will take two to five months for completion depending
upon the size and complexity of the project. Normally, preliminary
process flow diagrams are produced as a first step and reviewed
with the client. Following on from this, critical process system
equipment specifications and data sheets are issued for early
procurement.

Prepare Project Coordination Procedure


The project coordination procedure is prepared by the PM as early
as possible in the project and submitted to and approved by the
client. The following typical subjects are covered. Additional
paragraphs may be added to suit the project.
z

Job titles and numbers

Contract data

Scope of work

Client's responsibilities

Correspondence, contacts and addresses

Approvals

Engineering

UNIT 11: Initiating a Project

Procurement

129

Construction

Notes

Operation and start-up

Accounting

Project controls, changes and reports

Job close out

___________________
___________________

Project procedures;

Distribution of documents and their approval;

Standard drawing title blocks;

Organization charts;

Project document control and management.

)U

When initiating a project, the PM requests a review of the project


estimate, no matter how preliminary. The detail and potential
accuracy of an early estimate prepared for job scooping can vary to
a great degree depending upon the extent of the work put into the
proposal prior to contract award. It may vary from an order of
magnitude dollar value for the total installed cost to a fully defined
estimate.
A preliminary estimate can be subdivided into values for home
office services, equipment materials, bulk materials, construction
labour, construction supervision and indirect. Having established
the dollar values of these components, the home office man-hours,
the field labour man-hours and the construction supervision manhours can also be determined. Even though these methods may
give approximate values, they do establish the general magnitude
and complexity of the work to be performed and provide a basis for
preliminary planning.

(c

___________________
___________________
___________________

PE

The following additional documents are prepared as exhibits or


attachments to the project coordination procedure:

Analyze Preliminary Project Estimate

When the process design is approved, the project estimator


prepares the first control estimate. This estimate provides a firm
budget for equipment and home office costs and factored estimates
for bulk materials, construction labour and field indirects.
A defined estimate is prepared on completion of the analytical

___________________
___________________
___________________
___________________
___________________

Project Management & Its Applications

___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________

Issue Preliminary Project Schedule

An important project initiation step is to issue a project schedule.


If the project definition has not been developed to the point where
firm equipment and material deliveries can be determined, a
preliminary project master schedule should be issued (1) to
establish desired milestone and target dates (2) to perform
preliminary planning and budgeting (3) to identify and establish
schedule dates for critical project activities and (4) to identify
critical equipment and material items.

To evaluate whether or not the preliminary schedule is achievable,


a preliminary estimate is also essential. This quantifies the work
to be performed within the project schedule time frame. PM should
review the preliminary project master schedule to ensure that any
milestones or time delays which are specific to the project (such as
funding approvals, regulatory approvals, site access limitations,
manpower availability problems, weather problems, etc.) have
been taken into account. Manpower loading curves should also be
prepared to check that the proposed schedule does not create
unrealistic manpower peaks.

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___________________

engineering phase, at which time bulk materials are taken off and
priced. The defined estimates provide the firm with a basis for cost
control for the on going project execution.

Notes

PE

130

To ensure that the project proceeds without delay, a starter


schedule is issued along with the preliminary project master
schedule. The starter schedule lists the important activities to be
performed during the first 30 to 90 days of the project while project
master schedule is being developed. The project master schedule is
issued together with detailed engineering and procurement
schedules, on completion of process design, when delivery times for
critical equipment and materials can be established. Detailed
construction schedules are developed during the engineering phase
prior to start of work in the field.

Review Engineering Plan


The engineering plan prepared by the project engineering manager
expands the project plan in areas relating to engineering,
providing more specific information on the following topics:
z

Engineering work scope;

Design basis for process units and offsites;

UNIT 11: Initiating a Project

Engineering and design evaluations;

Maintenance, reliability and flexibility needs;

Material selection criteria;

Engineering economics and design philosophy;

Design specifications and standards;

Applicable codes and regulations;

Equipment layouts and plant arrangements;

Use of models (now PDS system gives 3D models on


computers);

Engineering problems specific to the project.

___________________
___________________
___________________
___________________

PE

)U

During the project initiation stage, the first task of the project
procurement manager is to prepare the procurement plan
amplifying the procurement aspects of the project plan. The
procurement plan establishes the procurement philosophy for the
project. It identifies the critical items of equipment and materials,
lists those items which will be provided "sole source", that is from a
specified supplier; notes material which are "free issue," provided
by subcontractors or from other sources; establish quality and cost
philosophies; the number of competitive bids required; whether or
not the policy is to purchase locally, nationally or worldwide. The
procurement plan is reviewed by the PM and may be subject to
approval by the client before issue. Following on from the
procurement plan, detailed procurement procedures are drawn up
which specify the purchasing forms to be used, the approval levels,
the routing and distribution of purchase documents and any
special referencing and numbering codes to be used.
Along with the above, an approved bidders list is prepared
reflecting the policies established in the procurement plan. The
approved bidders list is set up by using project procedures for each
category of equipment, material and service. All bidders on the
approved list will be suppliers who have performed satisfactorily in
the past and have proved themselves by their quality and
reliability. The project procurement manager also participates in

(c

Notes

___________________

PM reviews the engineering plan prior to its release by the project


engineering manager.

Review Procurement Plan

131

___________________
___________________
___________________
___________________
___________________

Project Management & Its Applications

___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________

Review Construction Plan

The project construction manager prepares the construction plan


during the project initiation phase. The following points are
considered:
z

Site and local area survey;

Site preparation, site access and weather restrictions;

Temporary construction facilities;

Heavy rigging studies;

Construction equipment requirements;

Construction priorities and erection sequence;

Construction methods and procedures;

Material receiving requirements;

Pre-fabricated modular sections;

Site fabrication shop vs. field fabrication;

Site fabricated vessels and tanks;

Construction staffing and organization;

Field inspection and quality control;

Field safety procedures;

Labour availability and hiring plans;

Labour relations;

Labour housing camp;

Construction subcontract arrangements;

Local codes and permits;

Construction planning, scheduling and cost control.

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___________________

the preparation of sub-contracts, expediting and inspection plans.


Traffic surveys are initiated early for difficult site locations since
transport requirements may impact upon the engineering/
procurement effort and could require special marshalling yards,
landing facilities or customs arrangements.

Notes

PE

132

The PM satisfies himself that the construction plan fulfils the


project needs. Early planning of all these aspects is essential for
smooth and effective construction mobilization at the appropriate
time.

UNIT 11: Initiating a Project

Check Your Progress


Fill in the blanks:
1.

2.

has to take over the scene delicately


but firmly both with the client and within his own
organization.

A comprehensive project procedure is necessary for


effective management.

Summary

)U

This unit lists out and details the important actions to be taken by
PM at the time of initiation of a project. The most important steps
to be taken are aimed at: Establishing communication channels
and procedures with the client, making estimates of manpower
deployment for achieving project completion within agreed
schedule, Draw up project master schedule and identify critical
path activities and Preparation and review of engineering,
procurement and construction schedules.

Lesson End Activity

Prepare an agenda for kick-off meeting with client.

Keywords

Client: A person or organization using the services of a lawyer or


other professional person or company.

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133

Notes

___________________
___________________
___________________
___________________
___________________

PE

At this stage, the project has been initiated. If the PM has directed
his efforts to ensure that the basic project initiation steps have
been properly completed, he will no longer be the leader of an
unfamiliar team in a race against time on an unknown course with
undefined rules. He will now have an organized integrated team,
all working to a common plan. The overall success of the project
can depend, to a great extent, upon how thoroughly the project
initiation steps have been carried out.

Communication Channel: A medium through which a message


is transmitted to its intended audience, such as print media or
broadcast (electronic) media.

___________________
___________________
___________________
___________________
___________________

Project Management & Its Applications

___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________

Engineering: The branch of science and technology concerned


with the design, building, and use of engines, machines, and
structures.

Notes

Initiation: Initiation is a rite of passage ceremony marking


entrance or acceptance into a group or society.
Manpower: Total supply of personnel available or engaged for a
specific job or task.

PE

134

Procurement: Procurement is the acquisition of goods, services or


works from an external source.
Project: Planned set of interrelated tasks to be executed over a
fixed period and within certain cost and other limitations.

___________________

Questions for Discussion


1.

Describe the rate of resource built-up in various areas on


initiating a project.

2.

List the major steps to be taken by project manager for


implementing new project.

3.

Describe Project Coordinating procedure.

4.

How preliminary project schedule is developed?

5.

List out important steps to be taken when a project is


initiated. Discuss their relevant importance and the pitfalls if
these steps are not taken properly.

(c

)U

___________________

Further Readings
Books

Clements/Gido, Effective Project Management, Thomson.


Clifford F. Gray and Erik W. Larson, Project Management, Tata
McGraw Hill.
Dennis Lock, Project Management, Ninth Edition, Gower.

K. Nagarajan, Project Management, Third Edition, New Age


International.
Prasanna Chandra, Projects-Planning, Selection, Financing,
Implementation and Review, Sixth Edition, Tata McGraw Hill.

UNIT 11: Initiating a Project

Vasant Desai, Project Management, Second Revised Edition,


Himalaya Publishing House.

135
Notes

P.C.K. Rao, Project Management and Control, Sultan Chand &


Sons.

___________________
___________________
___________________

Web Readings

___________________
___________________

PE

http://www.method123.com/project-initiation-phase.php
http://www.chandleraz.gov/Content/PM000PMMethodologyGDE.pdf
http://www.lincoln.ne.gov/city/pworks/engine/dconst/gpp/pdf/prjing
pp.pdf

http://www.kumlanderlab.com/idu3390/idu3390_konsp_4_2011_eng.
pdf
http://www.processimpact.com/handbooks/pi_intro_and_chapter_1.
pdf

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http://projectmanagementblog.com/five-steps-initiating-project

___________________
___________________
___________________
___________________
___________________

Project Management & Its Applications

136

Notes
___________________
___________________
___________________

___________________
___________________
___________________
___________________
___________________

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___________________

PE

___________________

UNIT 12: Project Execution

Unit 12

137

Project Execution

___________________
___________________
___________________

Objectives

Meaning of Project Execution

Project Managers and Project Team Responsibilities

Issue of Network, Work to List and Work Order Form

)U

In this unit, you will study about the project execution and control
phase of a project life cycle. Project execution (or implementation)
is the phase in which the plan designed in the prior phases are put
into action. The purpose of project execution is to deliver the
project expected results (deliverable and other direct outputs).
Typically, this is the longest phase of the project management
lifecycle, where most resources are applied. During the project
execution, the execution team utilizes all the schedules, procedures
and templates that were prepared and anticipated during prior
phases. The completion of start-up activities ensures that all
elements are in place and project is ready to take-off. Project
execution converts the plan into tangible asset, fulfilling a set of
objectives. However, in real life, this transition from plan to
tangible asset is not smooth.
In the standard division of project management discipline this
phase is called "Project Execution and Control"; the term "control"
is included here because execution is not a blind implementation of
what was written in advance but a watchful process where doing
things goes along with understanding what is being done, and redo it or do it differently when the action does not fully responds to
what was meant for. This "control" is an integral part of project
management and is a necessary task of the project manager.

(c

___________________
___________________

PE

After completion of this unit, the students will be aware of the following
topics:

Introduction

Notes

As per Fayol, to control means seeing that everything occurs in


conformity with established rules and expressed command. In
the context of project management, the project control may be
defined as taking corrective measures to resolve deviation or
discrepancies between plan (where one should be) and performance

___________________
___________________
___________________
___________________
___________________

Project Management & Its Applications

___________________
___________________
___________________
___________________
___________________
___________________
___________________

(where one is). The task of a project manager is to periodically


monitor the performance, calculate the deviations and make
adjustment in input, process or plan so as to resolve the deviation
and bring back the project to the desired state.

Notes
Activity
___________________
Make
an assignment on the
qualities of team members
___________________
quality
of executing the
project.
___________________

Meaning of Project Execution

At the time a project moves into the Execution Phase, the project
team and the necessary resources to carry out the project should be
in place and ready to perform project activities. The project plan
should have been completed and base lined by this time as well.
The project team and specifically the Project Managers focus now
shifts from planning the project efforts to participating in,
observing, and analyzing the work being done. Once all essentials
are in place, the project manager plans to commence the project.
He organizes a meeting, called 'kick-off meeting or event' of all
concerned to mainly announce the start of the project. He takes the
opportunity to present the main features of the project, project
objectives, organization, etc. Purpose of the meeting is to ensure
that:
Team members understand the features of the project

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)U

1.

PE

138

2.

Team members understand the project objectives

3.

All issues and apprehensions are clarified, so that each starts


the project with a clear mind

4.

Each member understands his/her role, authority and


responsibility.

Figure 12.1 shows where in the project management the execution


phase occurs.

Figure 12.1: Project Management Execution Phase

UNIT 12: Project Execution

Fill in the blanks:


The is an integral part of project
management and is a necessary task of the project
manager.

2.

is a list prepared separately for each


agency, after resource scheduling process.

Notes
Activity
As ___________________
a Project Manager, what
are your duties towards
___________________
carrying
out and executing the
project of your organisation.
___________________
___________________
___________________

PE

1.

139

Check Your Progress

___________________

Project Managers and Project Team Responsibilities

)U

A Project Managers responsibilities do not stop once the planning


of the project is done. Because a Project Manager is responsible to
internal and external stakeholders, the project team, vendors,
executive management, etc. the visibility of the position is
intensified. Many of these people will now expect to see and discuss
the resulting deliverables that were so meticulously detailed in the
Planning Phase. As a Project Manager, keeping oneself from
getting down in the weeds, especially on large projects, will be
important during project execution. This will allow the Project
Manager to focus their attention on enabling the project plans,
processes and managing the expectations of customers and
stakeholders.
Particular attention during Project Execution will need to be paid
to keeping interested parties up to date with project status, dealing
with procurement and contract administration issues, helping
manage quality control, and monitoring project risk. While the
processes to control many of these elements are discussed within
the Project Control Phase, it is still important that the Project
Manager be cognizant of the issues as the project is being
performed. Daily interaction and feedback from team members will
be vital to project success.

(c

Project Team Responsibilities

The project team members are expected to assist in the


management of the project as well; albeit, at a more functional
level. The critical project management elements for the project
team to provide assistance with include:

___________________
___________________
___________________
___________________

Project Management & Its Applications

___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________

Performance Monitoring

Notes
Activity
___________________
Prepare
Work Order Form of
your company.
___________________

Implement an execution plan to measure actual performance as


compared to planned performance. For example, actual project
schedules will need to be reviewed periodically and compared to
baseline schedules in order to discern if the project is performing
according to plan. If the project is not performing according to
baseline, steps will be taken to get the project back on track. The
same monitoring and analyzing should take place on budgets,
quality, risks, scope, etc.

PE

140

Provide Project Status

While the project manager is responsible for relaying project status


to parties outside the project team, the project team is expected to
report status to the project manager. This includes communicating
information on both a formal and informal basis.

Check Your Progress

True or False:

Work-to list is usually prepared to cover only a few


weeks ahead.

(c

)U

1.
2.

Once all essentials are in place, the project manager


plans to commence the project by organizing a meeting,
called 'kick-on meeting'.

Issue of Network, Work to List and Work Order Form


For execution of a large project, many-a-times three types of
network are prepared. These include:
1.

Critical Path Network: Critical path networks highlight


which tasks are critical for a project to stay on schedule and
which can slide without affecting the completion date of the
project. This allows tasks to be prioritized. This shows only
critical path activities. This may be used by senior level
executives.

2.

Detailed Network: This is final network which has been


arrived at after resource rescheduling process, satisfying
resource constraints and show all activities including activities
of critical path.

UNIT 12: Project Execution

Agency Wise Network: This network only shows the


activities to be executed by a particular agency. This provides
easy accounting for executing agency.
Work-to List: Work-to list is a list prepared separately for
each agency, after resource scheduling process. It is
recommendation to the concerned managers of the sequence
and timing of work to be donea list to be worked upon.
Work-to list is usually prepared to cover only a few weeks
ahead. However, it may cover the details of longer period as
per need. Example of work-to list is shown in Table 12.1.
Table 12.1: Work-to List

ID

Activity
Description

Duration

Resource

1.

ABC

US-4
S-2

US Unskilled labour, S Skilled labour

___________________
___________________
___________________

15-03-08

17-3-08

___________________

)U

(c

___________________

___________________

Activity Description:

Progress on
Date (Days
Work or %)

___________________

___________________

Work Order No:

Date No. of Men


Deployed

___________________

Scheduled
Completion

Table 12.2: Work Order Form

Actual Start Date:

___________________

Scheduled
Staff

In addition to agency-wise network and work-to list, some


organizations also release work order form (shown in Table 12.2)
for executing agency.

Scheduled Start Date:

Notes

PE

4.

141

3.

Scheduled Completion Date:

Actual Completion Date:


Problem/Hold
Up

Anticipated
Completion
Date

Sign
of I/C

Besides giving complete account of resource allocation on day-today basis, progress made, and holds, if any need to be stated. Work
order form acts as a history sheet. It can help in managing future
network.

Project Management & Its Applications

142

Check Your Progress

Notes
___________________

Fill in the blanks:

___________________

1.

is final network which has been arrived


at after resource rescheduling process, satisfying
resource constraints and show all activities.

2.

highlight which tasks are critical for a


project to stay on schedule and which can slide without
affecting the completion date of the project.

___________________
___________________
___________________
___________________
___________________
___________________

Summary

Project execution converts the plan into tangible asset, fulfilling a


set of objectives. This conversion is seldom smooth and needs
midcourse correction, provided by project control. At the time a
project moves into the Execution Phase, the project team and the
necessary resources to carry out the project should be in place and
ready to perform project activities. The project plan should have
been completed and base lined by this time as well. A Project
Managers responsibilities do not stop once the planning of the
project is done. Because a Project Manager is responsible to
internal and external stakeholders, the project team, vendors,
executive management, etc. the visibility of the position is
intensified.

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___________________

PE

___________________

Lesson End Activity


Visit this site- http://www.method123.com/project-executionphase.php, register youself and collect recent information
regarding communication law and policy. Prepare a research paper
on it.

Keywords

Execution: The carrying out or putting into effect of a plan, order,


or course of action.
Kick-off Meeting: Gathering of interested parties to discuss a
plan or strategy before launching a program or project.
Project Management: Project management is the discipline of
planning, organizing, motivating, and controlling resources to
achieve specific goals.

UNIT 12: Project Execution

Notes

___________________
___________________
___________________
___________________
___________________

PE

Team Members: A person belonging to a specific group of people


involved in attempting to achieve a common goal.

143

Project Manager: A project manager is a professional in the field


of project management and can have the responsibility of
the planning, execution and closing of any project, typically
relating to construction industry, architecture, Aerospace and
Defence, computer networking, telecommunications or software
development.

___________________

Questions for Discussion

___________________

Define Project Control.

2.

Discuss the Purpose of the meeting.

___________________

3.

Draw a diagram highlighting the Project Management


Execution Phase.

___________________

4.

Describe the concept of Project Execution.

5.

Who is Project Manager?

6.

Write short note on Work-to List.

)U

1.

Further Readings
Books

Clements/Gido, Effective Project Management, Thomson.


Clifford F. Gray and Erik W. Larson, Project Management, Tata
McGraw Hill.
Dennis Lock, Project Management, Ninth Edition, Gower.
K. Nagarajan, Project Management, Third Edition, New Age
International.

(c

Prasanna Chandra, Projects-Planning, Selection, Financing,


Implementation, and Review, Sixth Edition, Tata McGraw Hill.
P.C.K. Rao, Project Management and Control, Sultan Chand &
Sons.
Vasant Desai, Project Management, Second Revised Edition,
Himalaya Publishing House.

___________________

Project Management & Its Applications

Notes
___________________
___________________
___________________
___________________

Web Readings

144

http://oa.mo.gov/itsd/cio/projectmgmt/V4_1/MOBPM_Chapter05_V
4_1.pdf

http://www.cioarchives.ca.gov/ITpolicy/pdf/PM5.1_Project_Executio
n_Introduction.pdf

___________________

http://www.its.ny.gov/pmmp/guidebook2/ExecutionAndControl.pdf

___________________
___________________

http://www.oceanleadership.org/wp-content/uploads/2009/04/100100000_PEP_OOI_ver_3-06_Pub.pdf

___________________

http://pmstats.dis.arkansas.gov/Meth/07-Execution%20Phase.pdf

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___________________

PE

___________________

http://www3.imperial.ac.uk/estatesprojects/projectprocedures/proce
sses/pm/1.40/1.40.03

UNIT 13: Developing a Project Schedule

Unit 13

145

Objectives

A Sample Project

Major Elements

Procurement

Construction

Engineering

The Total Project

Introduction

)U

Some basic information must be available before a project schedule


can be developed. It is possible to create a schedule even when less
information is available than listed, because much information can
be generated statistically or by pro-rating.

A Sample Project

For illustration purposes, the following typical project is assumed:


z

Total installed cost (engineering/procurement/construction)


$100 million

Home office man-hours (at 10% at $35 per hour) 300,000


hours

Direct field labour hours (at 20% at $15 per hour) 1,300,000
hours

Ratio of field labour to home office hours 4.3 to 1

(c

___________________
___________________

PE

After completion of this unit, the students will be aware of the following
topics:

Developing a Project Schedule

Notes
Activity
___________________
Considering
your project as
the sample project, detail out
the ___________________
items given in table 13.1
as per your project.
___________________

Type of project refinery hydro-desulfurizer for a major oil


company

Operating conditions maximum temperature 1,200 deg F,


maximum pressure 600 psig

Number of equipment items 250 (approximate hours per


piece 1,200)

___________________
___________________
___________________
___________________
___________________

Project Management & Its Applications

Notes
Activity
___________________
Make
a list of major elements
of your project.
___________________

Equipment types exchangers, pressure vessels, compressors,


furnaces, towers

Long delivery items furnace tubes, compressors, and alloy


exchangers

___________________

Material of construction mainly carbon steel but some alloy

___________________

Piping large bore pipe and also alloy pipe

___________________

Structural steel major plant structures required

___________________

Plant location to be built on the US Gulf coast

Site conditions level and clear/approximate plot area 400ft


440ft

___________________

Field fabricated/erected items furnace and main tower

___________________

Procurement worldwide purchase based on competitive price


and delivery

Approvals client approves all major drawings

Schedule constraints

___________________

Process design completed as a package to be released to


engineering contractor three months after award.

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PE

___________________

146

Start of engineering in three months.

Release of funds to commit purchase in six months.

construction jobsite available in nine months.

Check Your Progress

Fill in the blanks:


1.

Process design completed as a package to be released to


engineering contractor months after award.

2.

worldwide purchase based on competitive


price and delivery

Major Elements

The major elements or activities in any schedule are engineering,


procurement and construction. The first step is to develop
independent sub-schedules for each of these major activities.
z

Engineering process design, conceptual/analytical


engineering, production design, specifications, requisitions and
drawings.

UNIT 13: Developing a Project Schedule

Procurement inquiries, bid evaluations, purchase orders,


expediting, inspection and delivery to project site.
Construction temporary facilities, material receipt and
erection (civil, structures, equipment, piping, instruments,
electrical, paint and insulation).

Notes
Activity
___________________
Prepare
a
procurement
schedule for your project.
___________________
___________________
___________________
___________________

PE

Schedule development can start with any of the above elements. A


start should be made with either procurement or construction.
Leave engineering until last. The reason is that engineering
activities are most flexible and adaptable. The engineering
approach may well be modified or governed by schedule constraints
arising in the procurement or construction areas. Construction
logic is governed by the required building sequence. Procurement
durations may be dictated by third parties.

147

___________________
___________________
___________________
___________________
___________________

Check Your Progress


Fill in the blanks:

The first step is to develop independent


for each of these major activities.

2.

logic is governed by the required


building sequence.

)U

1.

Procurement

Procurement starts with enquiry requisition and when material is


received at site. The logic is simple. There are a large number of
similar, independent parallel activities. For each of these there are
a fixed number of sequential activities.

(c

The procurement schedule is influenced mainly by outside sources.


Technical data and technical reviews are conducted by
engineering. Approvals are governed by the client and/or
management. Quotation durations, drawings and material
deliveries are set by vendors. Inspection and transportation are
also set by others. The durations directly controlled by the
procurement group are a small part of the total time span.

Procurement Cycle

The first step in the development of the procurement schedule is to


establish a "procurement cycle". It lists the sub-activities which
must be performed from the inquiry requisition to purchase order

Project Management & Its Applications

___________________
___________________
___________________
___________________
___________________
___________________
___________________

placement and receipt of vendor drawings. All sub-activities must


be included even though each one may only take a few days.
Cumulatively, they can add to substantially to the procurement
schedule.

Notes

Table 13.1 illustrates a chart used to establish the procurement


cycle. The left hand column lists the major sequential activities.
The chart is completed by assessing the number of working days
required for each of the sub-activities. Working days are used in
place of weeks to allow for the effect of weekends. Overall calendar
weeks are determined by dividing the cumulative working days by
five.

___________________

Table 13.1: Procurement Cycle Chart

___________________

ACTIVITIES

REF NOTE
Durations are working days
() are cumulative working
days

(c

DURATIONS

Complex
Standard
Bulk
Equipment Equipment Material
Item
Item
Item
A
B
C

Requisition Ready for Inquiry

0
(0)

0
(0)

0
(0)

Client Approval Received

8
(8)

5
(5)

5
(5)

)U

___________________

PE

148

Issue Inquiry to Vendors

7
(15)

5
(10)

3
(8)

Receive Quotations

30
(45)

20
(30)

15
(23)

Complete Bid Evaluation

20
(65)

15
(45)

7
(30)

Client Approval Received

10
(75)

10
(55)

5
(35)

Place Purchase Order

5
(80)

5
(60)

5
(40)

Total Equivalent Weeks

16

12

Receive Preliminary Vendor


Prints

20
(100)

15
(75)

00
(50)

Receive Final Vendor Prints

20

15
(90)

10
(60)

Added Equivalent Weeks

Since durations differ for major complex equipment items,


standard equipment items and bulk materials, three columns
are included in the chart for three separate procurement cycles
(1) major complex equipment (2) standard equipment and (3) bulk
materials (such as piping, electrical, instruments, structures and
civil).

UNIT 13: Developing a Project Schedule

Having established the procurement cycle, which sets the time up


to the purchase order, add delivery and shipment times for each
material category.

149
Notes
Activity
___________________
Prepare
a
construction
schedule for your project.
___________________

When establishing activity durations, be realistic. Do not


unreasonably shorten vendor bid times. Bids will merely be late or
incomplete, which will require more rebid or follow-up time.

___________________
___________________

Equipment/Material List

PE

___________________

The first step is to list the major equipment and material


categories required. Durations are then added from experience or
by telephone contact with lead vendors. Vendor's telephone quoted
deliveries are usually their best and most optimistic. Frequently, a
vendor's quoted delivery starts from receipt of approved drawings
released for fabrication and not necessarily from purchase order.
Also, promised delivery may be the day it is completed in shop
without allowance for inspection, witnessed performance test, or
transportation arrangements.

)U

Shipment times can be the most unpredictable, varying from a few


days to several weeks. If a conservative allowance is put in here, it
can be a buffer to cover inspection delays, rejection or other
transportation hold-up.

Check Your Progress

Fill in the blanks:


1.

The procurement schedule is influenced mainly by


sources.

2.

The first step in the development of the procurement


schedule is to establish a .

Construction

(c

Before construction can start, drawings and materials must arrive


at the jobsite. Thereafter, construction proceeds in sequence
governed by work's physical nature. Excavation precedes
foundations, which are followed by steel and equipment erection.
Piping, electrical and instrumentation then commence in sequence,
finishing with insulation and painting.

Sequences

In general, construction activities follow a predetermined


sequence. They must follow one another in a set order like building

___________________
___________________
___________________
___________________
___________________

Project Management & Its Applications

___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________

If it can be assumed that drawing and material deliveries will not


present a problem, then how long should the construction work
take? It becomes a matter of resource. How large a labour force is
available and how many workers can be economically applied to
the job? Too few and the job will take too long. Too many may
mean lower productivity and inefficient working. There could also
be problems of inefficient use of construction equipment and costly
short-term supervisory peaks.

Man-hours

Figure 13.1 shows a series of typical overall construction curves for


one million labour man-hours spread over a construction duration
of 6 to 36 months. Although the curve shapes are the same, the
peak manpower requirements, as shown by the dotted line,
increase exponentially as durations are shortened.

(c

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___________________

blocks. The field has little opportunity to be flexible or adaptable.


Drawings and material must be delivered to the jobsite in the right
sequence, ahead of the time when they will be installed.

Notes

PE

150

Figure 13.1: Effect of Duration on Manpower Peak

UNIT 13: Developing a Project Schedule

For the project under consideration, the plot area is 400x400 feet,
which equals to 160,000 square feet. The economic peak manpower
therefore is 160,000/200 = 800 men.

Check Your Progress


Fill in the blanks:

Before construction can start, drawings and materials


must arrive at the.

2.

For preliminary planning purposes,


square feet per man is a good number to use.

)U

1.

Engineering

Engineering has been last until left because it is the most difficult
to schedule. For many reasons, the sequence of engineering
activities may not follow typical logic. It comes down to priorities,
preferences and discipline. However, some sequence is applicable
as process engineering precedes detailed engineering, some
engineering is dependent upon the receipt of vendor drawings, etc.
If minimum schedule is the priority, many engineering shortcuts
can be taken based on conservative, empirical assumptions.
Equipment and material can be "sole sourced" to save time.
The result may be a less than optimum design, with some added
costs. If design optimization and/or minimum cost is the priority,
then basic engineering may go through many recycles with
consequent effect on the schedule and man-hours.

(c

151

Notes
Activity
___________________
Prepare
an
engineering
schedule for your project.
___________________
___________________
___________________
___________________

PE

If manpower availability is not limiting, a method of determining


the economic construction manpower peak is to evaluate the
maximum manpower density per plot area. For a typical process
plant, a construction worker requires an average working area
between 150 and 250 square feet. For preliminary planning
purposes, 200 square feet per man is a good number to use. This
does not apply to off-site areas or to areas where piping and
equipment are more spread out. In these areas, the amount of
work available may not support a labour density of one man per
200 square feet.

Orderliness

Even though engineering activity sequences and durations may be


radically altered or re-arranged by priority dictate, engineering

___________________
___________________
___________________
___________________
___________________

Project Management & Its Applications

___________________
___________________
___________________
___________________
___________________

development must proceed in an orderly progression. Secondary


engineering or detail design must not be permitted to start until
primary decisions have been taken. Nothing is gained in the
schedule by out of sequence working, resource is wasted and time
is lost due to recycle.
The fundamental steps in engineering are:
z

Process design process flow diagrams, heat and material


balances, temperature, pressure, physical, chemical and flow
conditions; process equipment specifications and data sheets;
utility system balance diagrams and environmental systems
concepts and specifications.

Basic engineering piping and instrumentation diagrams


(P&Ids) for process and utilities; general engineering
specifications; equipment mechanical specifications; data
sheets and requisitions; plot/site plans (block model); plant
arrangement studies (planning model) and electrical single
line diagrams.

Production engineering final site and plot plans;


production
design
model;
civil
and
structural
fabrication/erection drawings; final certified vendor drawings;
piping key plans and isometrics; instrument and electrical
field installation drawings and bulk material lists and
requisitions.

___________________
___________________
___________________
___________________

Notes

(c

)U

___________________

PE

152

In general, engineering development must proceed in the order of


the above steps. A certain amount of overlap may be permitted,
and on larger projects, specific areas or systems may be released
ahead of others.

Spread Charts

This fundamental staging of engineering work coupled with the


fact that there is a typical inter-relationship between the manhours and timing of each engineering discipline makes it possible
to develop prototype engineering discipline spread charts for
typical project conditions.

UNIT 13: Developing a Project Schedule

Fill in the blanks:


has been last until left because it is
the most difficult to schedule.

2.

Nothing is gained in the schedule by out of sequence


working, resource is wasted and time is lost due to
.

Notes
Activity
___________________
Write
a short note on total
project.
___________________
___________________
___________________
___________________

PE

1.

153

Check Your Progress

___________________

The Total Project

The last stage in the development of the project schedule is to


integrate the three independent sub-schedules for engineering,
procurement and construction to produce an overall master project
schedule. This may require a series of iterations. Start with a
standard master project schedule layout and make a first
assumption of a realistic (not optimistic) project schedule duration.
There are two early indicators which can be used to make the first
project duration assumption.

)U

Engineering (to the 90% point) normally should not exceed 65% of
the total project duration.

Therefore, if engineering = 15 to 16 months, then the total project


duration = say 15.5x100/65 = 23.8 months.
Project construction (excluding pre-project early site development
work) should normally never start earlier than 30% of total project
duration.
Therefore, if construction = 17 to 18 months, then the total project
duration = say 17.5x100/70 = 25 months.

Master Schedule

(c

For a first pass, set up a master project schedule format assuming


a project duration of 25 months from release of the process design
package to mechanical completion. Starting from the front, lay in
the engineering durations and requisition dates for equipment and
bulk material based upon the engineering schedule. Add on to
these the material delivery times from the procurement schedule
to give the equipment and material delivery dates.
Starting from the back end, lay in the construction craft durations
and the construction material required dates from the construction

___________________
___________________
___________________
___________________

Project Management & Its Applications

___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________

Comparative Analysis

One final check is to look at the relationship between the progress


curves generated from the master project schedule for engineering,
material delivery and construction. The relative positions and lead
times between these curves must always fall within certain limits
for all projects. If the progress curves for the project in question
differ to a marked degree from the typical curves, then something
is seriously wrong and we do not have a satisfactory preliminary
project master schedule. It will be necessary to take another look
at the points where the project progress curves deviate from the
typical progress curves.

Make Adjustments

(c

)U

___________________

schedule. Now look for "float" or "overlap". Float will show up if


material deliveries are ahead of the construction material required
dates. Overlap will show up if drawing or material deliveries are
later than the construction required dates. The overall schedule
may be compressed or elongated to eliminate float or accommodate
overlap. Usually, the second pass will achieve a reasonable fit and
produce a realistic balanced schedule.

Notes

PE

154

Finally, the "realistic" schedule produced by this method is not


necessarily the minimum schedule. If, after this exercise, the
durations produced are unacceptable, then compress the overall
duration to the desired point. Look at the overlap to determine
what positive steps must be taken to shorten what would
otherwise be considered a normal duration. Extra priorities in
engineering to make earlier decisions? More pressure in
procurement for shorter cycle times and accelerated deliveries?
More manpower peaking in the field? These are all options that
can be considered.
The schedule format will show up "pinch" points at an early date so
that schedule critical areas can be identified. This means that
specific action plans and priorities can be directed to these areas
from the project initiation if minimum schedule is an overriding
priority.

Realistic Milestones
A master project schedule developed by this "top-down" method
provides realistic milestones. These can subsequently be used for

UNIT 13: Developing a Project Schedule

Check Your Progress

155
Notes

the development of detailed schedules and networks within each of


the engineering, procurement and construction disciplines.

___________________
___________________

Fill in the blanks:


There are early indicators which can
be used to make the first project duration assumption.

2.

will show up if material deliveries are


ahead of the construction material required dates.

___________________
___________________
___________________

PE

1.

___________________
___________________

Summary

This unit details the method for development of schedule for


important phase of the project viz. engineering, procurement and
construction. Important aspects to be considered for the
development of schedules for the three phases of the project are
described at length. Development of a realistic project schedule by
integrating the three individual schedules is also explained.

)U

Lesson End Activity

List out the important factors governing the procurement schedule.


What are the methods for reducing the procurement period?

Keywords

Construction: Construction is a process that consists of the


building or assembling of infrastructure.
Float: Float will show up if material deliveries are ahead of the
construction material required dates.
Labour: The aggregate of all human physical and mental effort
used in creation of goods and services.

(c

Man-hours: A series of typical overall construction curves for one


million labour man-hours spread over a construction duration of
6 to 36 months.
Orderliness: Orderliness is having a sense of where things belong
and how they relate to each other, and keeping them organized
accordingly.

___________________
___________________
___________________

Project Management & Its Applications

___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________

Overlap: Overlap will show up if drawing or material deliveries


are later than the construction required dates.

Notes

Procurement Cycle: It lists the sub-activities which must be


performed from the inquiry requisition to purchase order
placement and receipt of vendor drawings.

Questions for Discussion

PE

156

1.

List basic information required for developing project schedule


for a new project.

2.

What are the main phases of projects and their manpower/cost


estimates?

3.

What is the network plan and how it is developed considering


dependencies and activity duration?

4.

What is critical path for a project and how does the activities
on critical path influence the project?

5.

Describe the important elements of a project for which


individual schedules are drawn. Why preparation of
engineering schedule can be taken up last of the three
schedules?

(c

)U

___________________

6.

State important aspects of the construction schedule. Draw


and describe a typical construction manpower deployment
schedule.

Further Readings
Books

Clements/Gido, Effective Project Management, Thomson.


Clifford F. Gray and Erik W. Larson, Project Management, Tata
McGraw Hill.
Dennis Lock, Project Management, Ninth Edition, Gower.

K. Nagarajan, Project Management, Third Edition, New Age


International.
Prasanna Chandra, Projects-Planning, Selection, Financing,
Implementation and Review, Sixth Edition, Tata McGraw Hill.
P.C.K. Rao, Project Management and Control, Sultan Chand &
Sons.

UNIT 13: Developing a Project Schedule

157
Notes

Vasant Desai, Project Management, Second Revised Edition,


Himalaya Publishing House.

___________________

Web Readings
http://www.mindtools.com/pages/article/newPPM_71.htm

___________________
___________________
___________________

PE

http://www.dummies.com/how-to/content/how-to-develop-yourprojects-schedule.html

___________________

http://www.cioarchives.ca.gov/ITpolicy/pdf/PM3.4_Planning_Projec
t_Schedule.pdf

___________________
___________________

http://www.ces.sdsu.edu/Pages/Engine.aspx?id=56

___________________

http://polaris.umuc.edu/mts/TMAN/Learn_Objects/mod3/html/page
1.html

___________________

(c

)U

http://blogs.pmi.org/blog/voices_on_project_management/2013/04/es
sentials-of-successful-proje.html

___________________

Project Management & Its Applications

158

Notes
___________________
___________________
___________________

___________________
___________________
___________________
___________________
___________________

(c

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___________________

PE

___________________

UNIT 14: PERT and CPM Techniques

Unit 14

159

PERT and CPM Techniques

Time Estimation

Determination of the Critical Path

PERT Model

CPM Model

___________________

___________________
___________________

PE

After completion of this unit, the students will be aware of the following
topics:
Development of Project Network

___________________

___________________

Objectives

Notes

___________________
___________________
___________________
___________________
___________________

Introduction

)U

The activities of a project have inter-relationships arising from


physical, technical, and other considerations. For proper planning,
scheduling, and control of the activities of a project, given their
inter-relationships and constraints on the availability of resources,
network techniques have been found quite useful. It may be noted
that financial institutions and the Government of India insist that
a network plan should accompany feasibility reports.

(c

There are two basic network techniques: PERT and CPM. PERT,
an acronym for Program Evaluation Review Technique was
originally developed to facilitate the planning and scheduling of
the Polaris Fleet Ballistic Missile Project of the US Government.
Designed to handle risk and uncertainty, PERT is eminently
suitable for research and development programmes, aerospace
projects, and other projects involving new technology. In such
projects, the time required for completing various jobs or activities
can be highly variable. Hence, the orientation of PERT is
'probabilistic'.
CPM, an acronym for Critical Path Method, is akin to PERT. It
was developed independently in 1956-57 by the DuPont Company
in the US to solve scheduling problems in industrial settings. CPM
is primarily concerned with the trade-off between cost and time. It
has been applied mostly to projects that employ a fairly stable
technology and are relatively risk free. Hence, its orientation is
'deterministic'.

Project Management & Its Applications

Notes
Activity
___________________
Identify
network technique for
your project management.
___________________
___________________

Widely diverse projects are amenable to analysis by PERT and


CPM. Such as launching a spaceship, research and development
programme, construction of a plant, building a river valley project,
overhaul of an organisation, training of manpower, starting a new
venture, and adult literacy programme. This unit discusses the
basics of PERT, CPM, and network cost system.

160

___________________

Development of Project Network

___________________

Basic to PERT as well as CPM, is the network diagram. The


network diagram, also referred to as the project graph, shows the
activities and events of the project and their logical relationships.
A simplified network diagram for a dinner project is shown in
Figure 14.1.

___________________
___________________
___________________
___________________

PE

___________________

Send Invitation

Receive Guests

(c

)U

Prepare Dinner

Take Dinner
4

Figure 14.1: Development of Project Network

The network diagram is constructed in terms of activities and


events. An activity is a definite task, job, or function to be
performed in a project. For example, 'prepare dinner' (see Figure
14.1) is an activity. An activity is represented by an arrow. The
head of the arrow marks the completion of the activity and the tail
of the arrow marks its beginning. (The length and 'compass'
direction of the arrow have no significance.) An event is a specific
point in time indicating the beginning or end of one or more
activities. It represents a milestone and does not consume time or
resources.
Since activities are the basic building blocks of a network diagram,
it is necessary to enumerate all the activities of the project. For
this purpose, it is helpful to break the project into several steps.
The number of steps, of course, would depend on the magnitude

UNIT 14: PERT and CPM Techniques

The forward method begins with the initial event, marking the
beginning of the project, and proceeds forward till the end event is
reached. The backward method begins with the end event and
works backwards till the beginning event is reached.

Rules for Network Construction

)U

The rules to be observed in constructing the network diagram are


discussed below:

Each activity must have a preceding and a succeeding event. An


activity is numerically denoted by the pair of preceding and
succeeding events. In the dinner project, for example, the activity
send invitations is designated as (1-2).
Each event should have a distinct number. The number given
to an event can be chosen in any way, provided this condition
is satisfied. In practice, however, events are so numbered that
the number at the head of the arrow is greater than that at its
tail.
1

(c

1.

Notes

___________________
___________________
___________________
___________________
___________________

PE

Once the activities are enumerated it is necessary to define for


each activity, the activities which precede it, the activities which
follow it, and the activities which can take place concurrently.
Given this information, the network diagram, showing the logical
relationship between activities and events may be developed either
the forward method or the backward method.

161

and complexity of the project. For industrial projects, generally, a


two step procedure could suffice. In the first step, the major parts
of the project are identified and in the second step the activities of
each major part are delineated. Activities should be so defined that
they are distinct, reasonably homogeneous tasks for which time
and resource requirement can be estimated.

Figure 14.2: A Network Diagram

___________________
___________________
___________________
___________________
___________________

Project Management & Its Applications

There should be no loops in the project network; a situation


like the one shown in Figure 14.2 is not permissible.

___________________

3.

Not more than one activity can have the same preceding and
succeeding events. This means that each activity is
represented by a uniquely numbered arrow and a situation
like the one shown in Figure 14.3 is not permissible.

___________________
___________________
___________________

2.

Notes

___________________
___________________
___________________
___________________
___________________
___________________

PE

162

Figure 14.3: A Loop

(c

)U

To ensure that each activity is uniquely numbered it may be


necessary sometimes to introduce dummy activities: A dummy
activity is an imaginary activity which can be accomplished in zero
time and which does not consume resources. It is represented by a
dashed arrow. Figure 14.4 shows a variant of Figure 14.3 with a
dummy activity (3-2) introduced to conform to the rules of network
construction.
3

Figure 14.4: A Dummy Activity

A dummy activity may also be used to represent a constraint,


necessary to show the proper relationship between activities.
Figure 14.5 shows part of a network diagram having a dummy
activity.
In Figure 14.5, X, represented as (7-6), is a dummy activity
showing a certain logical relationship. According to this figure,

UNIT 14: PERT and CPM Techniques

163
Notes

activities P (4-6) and Q (5-7) must be completed before activity R


(6-8) can start.

___________________

___________________
___________________
___________________

PE

___________________

___________________
___________________

Figure 14.5: A Dummy Activity

Illustration

A building project consists of the following activities:


A = Lay foundation
B = Erect framework
C= Install millwork

)U

D = Install wiring
E = Install plumbing
F = Plaster walls

G = Install siding

H= Decorate the interior


I = Finish the exterior

The interrelationship among these activities is as follows:


A should precede B.

B should precede C, D, E, F, and G.


C, D, E, and F should precede H.

(c

G should precede I

Given the above interrelationship the network diagram for the


project is developed, in several steps, using the forward method, as
shown in Figure 14.6.

___________________
___________________
___________________

Project Management & Its Applications


Lay

Notes
Activity
___________________
Write
a short note on time
estimation.
___________________

Erect Frame
2

164

Install Mill

___________________

Lay
Foundation

___________________

Erect Frame
2

___________________
___________________

___________________

Lay Foundation

___________________

Install plumbing

In Pla
sta
ste
rw
ll
alls
sid
in
g
F

Install Siding

Decorate the interior

Install Wiring

Erect frame

___________________

Install plumbing
E
Plaster Walls

PE

___________________

Install
Wiring

Finish the
Exterior

(c

)U

Figure 14.6: Network Diagram for the Project

Check Your Progress

Fill in the blanks:


1.

The , also referred to as the project


graph, shows the activities and events of the project
and their logical relationships.

2.

The begins with the end event and


works backwards till the beginning event is reached.

Time Estimation

Once the logic and detail of the network have been established,
time estimates must be assigned to each activity. Generally, three
time values are obtained for each activity:
z

Optimistic time (to)

Most likely time (tm)

Pessimistic time (tp)

The optimistic time, to, is the time required if no hurdles or


complications arise. The most likely time, tm is the time in which

UNIT 14: PERT and CPM Techniques

165
Notes

the activity is most likely to be completed. This estimate takes into


consideration normal circumstances, making allowance for some
foreseen delays. The pessimistic time, tp, is the time required if
unusual complications and, or unforeseen difficulties arise.

___________________
___________________
___________________

___________________

PE

___________________

___________________
___________________
___________________

___________________
___________________

Figure 14.7: Network Design

Obtaining Time Estimates

)U

Time estimates should be obtained by the PERT planner from


persons who are responsible for estimation. The following points
should be borne in mind while obtaining time estimates:

Time estimates should be obtained by skipping around the


network rather than by following a specific path. If estimates
are obtained by following one path, there is a tendency for the
person providing the estimates to add them mentally and
compare them with a previously conceived notion of the time of
the total path.

2.

The estimates of to, tm, and tp should be defined independently


of each other.

3.

The time available for completing the project should not


influence the estimates of to, tm and tp.

4.

It should be made known that to, tm and tp are estimates and


not schedule commitments.

(c

1.

5.

The estimates of to, tm and tp should include allowances for


occurrences which are generally considered as random
variables (weather conditions, administrative delays, etc.) but
not for occurrences that are normally not considered as
random variables (flood, wars, etc.).

Project Management & Its Applications

166

___________________
___________________

True or False:

___________________

Check Your Progress

1.

The optimistic time, tp, is the time required if unusual


complications and, or unforeseen difficulties arise.

2.

Time estimates should be obtained by the PERT


planner from persons who are responsible for
estimation.

PE

Notes
Activity
___________________
What
is critical path for a
project and how do the
___________________
activities
on critical path
influence the project?
___________________

___________________

Determination of the Critical Path

___________________

Once the network diagram with single time estimates has been
developed, the following computational procedure may be
employed for determining the critical path/s, event slacks, and
activity floats.

___________________
___________________

Calculate the Earliest Occurrence Time (EOT) for Each Event

(c

)U

An event occurs when all activities leading to the event have been
completed. In the network diagram shown in Figure 14.8, for
example, event 4 occurs when activities (2-4) and (3-4) are
completed. Obviously activity (2-4) cannot begin unless event 2
occurs, which in turn requires the completion of activity (1-2).
Likewise, activity (3-4) cannot begin unless event 3 occurs which in
turn requires the completion of activity (1-3). Thus, we find that
event 4 occurs when activities (1-2), (2-4), (1-3), and (3-4) are
completed. In other words, event 4 occurs when paths (1-2-4) and
(1-3-4) are completed.
The EOT, the earliest occurrence time, of an event refers to the
time when the event can be completed at the earliest. Looking at
event 4, we find that since the paths leading to it, viz. (1-2-4) and
(1-3-4) take 15 weeks and 20 weeks, respectively, the EOT of event
4 is 20 weeks. In general terms, the EOT of an event is the
duration of the longest path (from the beginning event whose EOT
is set at 0) leading to that event. The EOTs of various events in our
illustrative project are shown in Figure 14.8. It may be noted that
in Figure 14.8 and subsequent figures an event is represented by a
circle. The upper half of the circle denotes the event number, the
left quarter in the lower half denotes the EOT, and the right
quarter in the lower half denotes the latest occurrence time, a term
described later.

UNIT 14: PERT and CPM Techniques

167

___________________

15

13

Notes

13

___________________

28
12

___________________
___________________

PE

___________________

___________________

12

20

___________________
___________________

Figure 14.8: EOT

)U

The EOT of the end event obviously represents the minimum time
required for completing the project. To obtain the EOT of various
events we start from the beginning event and move forward
towards the end event. This computational procedure is referred to
as the forward pass. In this computation, we assume that each
activity starts immediately on the occurrence of the event
preceding it. Hence, the starting and finishing time for various
activities obtained from this computation are the Earliest Starting
Time (EST) and the Earliest Finishing Time (EFT).

Calculate the Latest Occurrence Time for Each Event

(c

The LOT for an event represents the latest allowable time by


which the event can occur, given the time that is allowed for the
completion of the project (occurrence of end event). Normally, the
time allowed for the completion of the project is set equal to the
EOT of the end event. (In other words, the project is supposed to be
completed at the earliest possible time.) This means that for the
end event the LOT and EOT are set equal. The LOT for various
events is obtained by working backward from the end event. This
procedure is known as the backward pass. The LOT for event 4 in
our illustrative project, for example, is equal to the LOT for event
5, the end event, minus the duration of the activity (4-5) which
connects event 4 with 5. Since the LOT for event 5 is 28 weeks and
the duration of activity (4-5) is 2 weeks the LOT for event 4 is
26 weeks (28-2). This represents the latest time by which event
4 should occur to enable the project to be completed in 28 weeks.
Likewise, the LOT for other events can be calculated by moving

___________________
___________________

Project Management & Its Applications

Notes

backward. The LOT for various events is shown (in the right
quarter of the lower half of event nodes) in Figure 14.9.

168

___________________

___________________

13

13

___________________

15

___________________

___________________
___________________
___________________
___________________
___________________

PE

___________________

28

12

18

26

Figure 14.9: LOT

Calculate the Slack for Each Event

(c

)U

The slack for an event is the difference between its LOT and EOT.
The slacks for various events of our illustrative project are shown
in Table 14.1.
Table 14.1: Event Slack

Event

LOT

EOT

(In weeks)
Slack
= LOT
= EOT

28

28

26

20

18

12

13

13

Obtain the Critical and Slack Paths


The critical path starts with the beginning event, terminates with
the end event, and is marked by events which have a zero slack.
This is obviously the path on which there is no slack, no cushion.
Other paths are slack paths with some cushion. The critical path
for our illustrative project is (1-2-5). It is indicated by doubled
arrows in Figure 14.10.
The critical path is the longest path from the beginning event to
the end event. Since the end can be reached, i.e. project completed,

UNIT 14: PERT and CPM Techniques

169
Notes
Activity
___________________
Describe
the term PERT.

only when this longest path is traversed, the minimum time


required for completing the project is the duration on the critical
path. The duration on the critical path of our project is 28 weeks;
this is the minimum time required for completing the project. (It is
already indicated by the EOT of event 5, the end event.)

___________________
___________________

Compute the Activity Floats

___________________
___________________

PE

Given the estimates of activity time and event slacks, activity


floats can be calculated. There are three measures of float: (i) total
float; (ii) free float; and (iii) independent float. For illustrating
these measures, let us consider activity (2-4) of our illustrative
project. Activity (2-4) is shown in Figure 14.10.

___________________
___________________
___________________
___________________

___________________

13 13
13

15

28 28

)U

0 0

12

12 18

20 26

Figure 14.10: Computing the Activity Floats

Check Your Progress

Fill in the blanks:

The of an event refers to the time


when the event can be completed at the earliest.

2.

The for an event is the difference


between its LOT and EOT.

(c

1.

PERT Model

So far, the analysis was focused on the determination of the critical


path, event slacks, and activity floats. For this purpose, we used
single time estimates of activity duration though initially three

Project Management & Its Applications

___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________

time estimates were developed for each activity. Now we consider


the variability of project duration.

Notes

Measures of Variability

Variability in PERT analysis is measured by variance or its square


root, i.e. standard deviation. Variance of a set of numbers is the
average squared difference of the numbers in the set from their
arithmetic average. A simple example may be given to illustrate
the calculation of variance. Let a series consist of numbers 4, 6,
and 8. The average of this series is 6. The differences of various
numbers in the series from this average are 2, 0, and 2. Squaring
them we get 4, 0 and 4. Hence, the variance the average of
squared difference is 8/3 and standard deviation is 8/3.

PE

170

The steps involved in calculating the standard deviation of the


duration of critical path are as follows:
Step 1: Determine the standard deviation of the duration of each
activity on the critical path.

(c

)U

Step 2: Determine the standard deviation of the total duration of


the critical path on the basis of information obtained in step 1.
For determining the standard deviation of the duration of an
activity, we require the entire probability distribution of the
activity distribution. We, however, have only three values from
this distribution: tp, tm, and to. In PERT analysis, a simplification is
used in calculating the standard deviation. It is estimated by the
formula:
Standard deviation = (tp to)/6
Where, tp = pessimistic time
to = optimistic time

Variance is obtained by squaring standard deviation.


The standard deviation and variance of the activities on the critical
path of our illustrative project are shown in the following table:
Activity

tp

to

O = (tp-to)/6

Variance = O2

(1-2)

21

5.00

(2.5)

24

10

2.33

5.43

Assuming that the probability distribution of various activities on


the critical path is independent, the variance of the critical path

UNIT 14: PERT and CPM Techniques

For real life projects which have a large number of activities on the
critical path, we can reasonably assume that the critical path
duration is approximately normally distributed, with mean and
standard deviation obtained by the method described above.

Range
Mean One standard deviation
Mean Two standard deviations

X-30
X+30

X-20

X-0

___________________
___________________
___________________
___________________

___________________

0.954

___________________

0.998

X+1

X+20

Armed with information about mean (T) and standard deviation


(a) for critical path duration, which is normally distributed, we can
compute the probability of completion by a specified date (D) as
follows:
Find Z = (D T)/SD, where Z is known as standard normal
variate with mean and variance

(c

___________________

0.682

Probability of Completion by a Specified Date

___________________

___________________

Figure 14.11: Normal Distribution

___________________

Probability

)U

Mean Three standard deviations

Notes

PE

A normal distribution looks like a bell shaped curve as shown in


Figure 14.11. It is symmetric and single peaked and is fully
described by its mean and standard deviation. The probability of
values lying within certain ranges is as follows:

171

duration is obtained by adding variance of activities on the critical


path.

Obtain cumulative probability up to Z by looking at the


probability distribution of the standard normal variate.

Project Management & Its Applications

Notes
___________________

This is shown in Table 14.2.


Table 14.2: Cumulative Probability up to Z for Standard Normal
Distribution

___________________

___________________

3.0

___________________
___________________
___________________
___________________
___________________

2.6
2.4

(c

0.001
0.003
0.005
0.008

2.2

0.014

2.0

0.023

1.8

0.036

1.6

0.055

1.4

0.081

1.2

0.115

1.0

0.159

0.8

0.212

0.6

0.274

0.4

0.345

0.2

0.421

0.0

0.500

0.2

0.579

0.4

0.655

0.6

0.726

0.8

0.788

1.0

0.841

1.2

0.885

1.4

0.919

1.6

0.945

1.8

0.964

2.0

0.977

2.2

0.986

2.4

0.992

2.6

0.995

2.8

0.997

3.0

0.999

)U

___________________

2.8

Cumulative Probability

PE

___________________

172

The above procedure may be illustrated for our project which has
T = 28 and SD = 3.07. The probability of completing this project by
certain specified dates is shown in Table 14.3.

UNIT 14: PERT and CPM Techniques

Specified

Probability of Completion by D

20

20 28
= 2.6
3.07

0.005

25

25 28
= 1.0
3.07

0.159

30 28
= 0.6
3.07

0.726

30

173
Notes
Activity
___________________
Explain
the
networking
techniques CPM.
___________________

Table 14.3: Probability of Completing of the Project

___________________
___________________

PE

___________________

Check Your Progress


True or False:
1.
2.

___________________

Variability in PERT analysis is measured by variance


or its square root, standard deviation.

___________________

Standard deviation is obtained by squaring Variance.

___________________

CPM Model

)U

The PERT model was developed for projects characterized by


uncertainty and the CPM model was developed for projects which
are relatively risk-free. While both the approaches begin with the
development of the network and a focus on the critical path, the
PERT approach is 'probabilistic' and the CPM approach is
'deterministic'. This does not, however, mean that in CPM analysis
we work with single time estimates. In fact, the principal focus of
CPM analysis is on variations in activity times as a result of
changes in resource assignments. These variations are planned
and related to resource assignments and are not caused by random
factors beyond the control of management as in the case of PERT
analysis. The main thrust of CPM analysis is on time cost
relationships and it seeks to determine the project schedule which
minimizes total cost.

Assumptions

(c

The usual assumptions underlying CPM analysis are:


1.

___________________

The costs associated with a project can be divided into two


components: direct costs and indirect costs. Direct costs are
incurred on direct material and direct labour. Indirect costs
consist of overhead items like indirect supplies, rent,
insurance, managerial services, etc.

___________________

Project Management & Its Applications

Activities of the project can be expedited by crashing which


involves employing more resources.

___________________

3.

Crashing reduces time but enhances direct costs because of


factors like overtime payments, extra payments and wastage.
The relationship between time and direct activity cost can be
reasonably approximated by a downward sloping straight line.
A typical cost time line is shown in Figure 14.12.

___________________
___________________
___________________

2.

Notes

___________________

___________________
___________________
___________________

Direct cost of
Activity

___________________

___________________

PE

174

Duration

Crash Time

Normal Time

Activity

Figure 14.12: A Typical Cost time Line

Indirect costs associated with the project increase linearly with


project duration. A typical line for indirect costs is shown in
Figure 14.13

(c

Indirect cost of
project

)U

4.

Procedure Duration

Figure 14.13: Indirect Costs

Procedure
Given the above assumptions, CPM analysis seeks to examine the
consequences of crashing on total cost (direct cost plus indirect
cost). Since the behaviour of indirect project cost is well defined,
the bulk of CPM analysis is concerned with the relationship

UNIT 14: PERT and CPM Techniques

Step 1: Obtain the critical path in the normal network. Determine


the project duration and direct cost.
Step 2: Examine the cost time slope of activities on the critical
path obtained and crash the activity which has the least slope.

Step 4: Repeat steps 2 and 3 till activities on the critical path


(which may change every time) are crashed.

The above procedure may be illustrated with an example. The


activities, durations, and direct activity costs of a project are
shown in Table 14.4. The indirect cost is ` 2,000 per week.
Table 14.4: Normal and Crash Time and Cost
Activity

Time in Weeks
Crash

8
5
9
7
5
3
6
10
9

4
3
6
5
1
21/2
2
7
5

Normal

Crash

3,000
4,000
4,000
2,000
8,000
10,000
4,000
6,000
4,200

6,000
8,000
5,500
3,200
12,000
11,200
6,800
8,700
9,000

45,200

70,400

Cost to Expedite
per Weeks

)U

Normal

Cost

450
2,000
500
600
1,000
2,400
700
900
1,200

The project network with normal duration is shown in Figure


14.14.
9

(c

10

___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________

Example:

1-2
1-3
2-4
3-5
2-5
4-6
5-6
6-7
5-7

Notes

PE

Step 3: Construct the new critical path after crashing as per step
2. Determine project duration and cost.

175

between total direct cost and project duration. The procedure used
in this respect is generally as follows:

5
7

Figure 14.14: Project Network (1)

___________________
___________________

Project Management & Its Applications

___________________
___________________
___________________
___________________

The critical path in the all normal network is (1-2-4-6-7). The


project duration is 30 weeks and the total direct cost is ` 45,200.

Notes

Examining the time cost slope of activities on the critical path, we


find that activity (2-4) has the lowest slope; in other words, the cost
to expedite per week is the lowest for activity (2-4). Hence, activity
(2-4) is crashed. The project network after such a crashing is
shown in Figure 14.15.

___________________

___________________
8

___________________

___________________

___________________

___________________

PE

176

6
10

Figure 14.15: Project Network (2)

(c

)U

As per Figure 14.15 the critical path is (1-2-5-6-7), with a length of


29 weeks, and the total direct cost is ` 46,700.
Looking at the time cost slope of the activities on the new critical
path (1-2-5-6-7), we find that the activity (5-6) has the lowest slope.
Hence, this activity is crashed. The project network after such
crashing is shown in Figure 14.16, the critical path is (1-2-4-6-7)
with a length of 27 weeks and the total direct cost is ` 49,500.

6
10

Figure 14.16: Project Network (3)

Comparing the time cost slope of the non-crashed activities on the


new critical path (1-2-4-6-7), we find that the activity which costs

UNIT 14: PERT and CPM Techniques

177
Notes

the least to crash is (1-2). Hence, this is crashed. The project


network after such a crashing is shown in Figure 14.17. As per this
Figure 14.17, the critical path is (1-3-5-6-7) with a length of 24
weeks and the total direct cost is ` 52,500.

___________________
___________________
___________________

10

___________________

PE

___________________

___________________

___________________

___________________
___________________

Figure 14.17: Project Network (4)

)U

Looking at the time cost slope of the non-crashed activities on the


new critical path, (1-3-6-7), we find that activity (6-7) has the
lowest slope. Hence, it is crashed. The project network after such a
crashing is shown in Figure 14.18. As per this Figure 14.18, there
are two critical paths (1-3-5-6-7) and (1-3-5-7), both with a length
of 21 weeks, and the total direct cost is ` 55,200.
6

6
7

___________________

Figure 14.18: Project Network (5)

(c

Considering the time cost slope of non crashed activities on critical


paths (1-3-5-6-7) and (1-3-5-7), we find that activity (3-5) which is
common to both the critical paths is the least costly to crash.
Hence, it is crashed. The project network after this crashing is
shown in Figure 14.19. As per this Figure 14.19, the critical path is
(1-2-4-6-7) with a duration of 201/4 weeks and the total direct cost is
` 56,400.

Project Management & Its Applications

178

___________________

___________________
___________________

___________________

Notes

PE

___________________

___________________
___________________

___________________

Looking at the new critical path (1-2-4-6-7) we find that the only
non crashed activity is (4-6). Crashing this gives us the project
network shown in Figure 14.20. As per this Figure 14.20, the
critical path again is (1-2-4-6-7) with a duration of 191/2 weeks and
the total direct cost is ` 57,600.
6

)U

(c

Figure 14.19: Project Network (6)

___________________
___________________

6
7

9
5

Figure 14.20: Project Network (7)

Since all the activities on the critical path (1-2-4-6-7) are crashed,
there is no possibility of further time reduction. Hence, let us now
look at the time-cost relationship. This is shown in Figure 14.20.
From Table 14.5, we find that the total cost is minimised for the
project schedule represented by the activities crashed are (1-2),
(2-4), (3-5), (5-6), (6-7). The information provided in Table 14.5 is
useful for decision-making.

UNIT 14: PERT and CPM Techniques

Table 14.5: Project Duration and Total Cost


Activities
Crashed

Project
Duration
in Weeks

Total
Direct
Cost

Total
Indirect
Cost

Total
Cost

Notes

Figure
No.

179

___________________
___________________

None

30

45,200

60,000

105,200

14.15

(2-4)

29

46,700

58,000

104,700

14.16

(2-4 and (5-6)

27

14.17

(1-2), (2-4) and


(5-6)

24

14.18

(1-2), (2-4), (5-6),


and (6-7)

21

14.19

(1-2), (2-4), (3-5),


(5-6), and (6-7)

20

14.20

(1-2), (2-4), (3-5),


(5-6), (4-6), and
(6-7)

191/2

___________________
___________________
___________________

PE

14.14

49,500

54,000

103,500

52,500

48,000

100,500

55,500

42,000

97,200

___________________

56,400

40,000

96,400

57,600

39,000

96,600

)U
Check Your Progress

Fill in the blanks:

CPM analysis is on variations in activity times as a


result of changes in .

(c
2.

___________________
___________________

If the objective is to minimize the total cost of the project, the


pattern of crashing suggested by Figure 14.19 is optimal. If the
objective is to minimize the project duration then, the pattern of
crashing suggested by Figure 14.20 is optimal. In real life
situations, however, both the factors may be important. In
addition, factors like strain on resources and degree of
manageability are also important. The final decision would involve
a careful weighing and balancing of these diverse factors, some
quantitative, some qualitative.

1.

___________________

seeks to examine the consequences of


crashing on total cost (direct cost plus indirect cost).

Summary

For proper planning, scheduling, and control of the activities of a


project, given their interrelationships and constraints on the

___________________

Project Management & Its Applications

___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________

availability of resources, network techniques have been found quite


useful. There are two basic network techniques: PERT and CPM.
PERT is applied mostly to projects characterized by uncertainty;
its orientation is probabilistic. CPM is applied to projects which are
relatively risk-free; its orientation is deterministic. Widely diverse
projects are amenable to analysis by PERT and CPM.

Notes

The network diagram is constructed in terms of activities and


events. An activity is a definite task, job or function to be
performed in a project. An event is a specific point of time
indicating the beginning or end of one or more activities. To ensure
that each activity is uniquely numbered it may be necessary to
introduce dummy activities. A dummy activity is an imaginary
activity which can be accomplished in zero time and which does not
consume resources. A dummy activity may also be used to
represent a constraint necessary to show the proper relationship
between activities.

PE

180

Lesson End Activity

(c

)U

What is the network plan and how it is developed considering


dependencies and activity duration?

Keywords

Activity: An activity is a definite task, job, or function to be


performed in a project.
Critical Path Method (CPM): The Critical Path Method (CPM)
is an algorithm for scheduling a set of project activities.
Event: An event is a specific point in time indicating the beginning
or end of one or more activities and represents a milestone and
does not consume time or resources.
Network Diagram: Network Diagram is a schematic
representation of the interactions of devices on a network.
Optimistic Time: The optimistic time, to, is the time required if no
hurdles or complications arise.
Pessimistic Time: The pessimistic time, tp, is the time required if
unusual complications and, or unforeseen difficulties arise.
Program Evaluation Review Technique (PERT): The Program
(or Project) Evaluation and Review Technique, commonly

UNIT 14: PERT and CPM Techniques

used

in

network

2.

Discuss the Time Estimation.

3.

What do you mean by determination of the Critical Path?

4.

Define PERT Model.

5.

Describe the CPM Model. Briefly explain.

___________________
___________________

PE

Define activity, event and path as


development. What is a dummy activity?

Clements/Gido, Effective Project Management, Thomson.

)U

Clifford F. Gray and Erik W. Larson, Project Management, Tata


McGraw Hill.
Dennis Lock, Project Management, Ninth Edition, Gower.
K. Nagarajan, Project Management, Third Edition, New Age
International.

Prasanna Chandra, Projects-Planning, Selection, Financing,


Implementation and Review, Sixth Edition, Tata McGraw Hill.
P.C.K. Rao, Project Management and Control, Sultan Chand &
Sons.
Vasant Desai, Project Management, Second Revised Edition,
Himalaya Publishing House.

Web Readings

(c

___________________

___________________

1.

Books

Notes

___________________

Questions for Discussion

Further Readings

181

abbreviated PERT, is a statistical tool, used in project


management, that is designed to analyze and represent the tasks
involved in completing a given project.

http://www.mindtools.com/critpath.html
http://en.wikipedia.org/wiki/Program_Evaluation_and_Review_Tec
hnique
http://home.snc.edu/eliotelfner/333/stones/page3.html
http://krypton.mnsu.edu/~tony/courses/609/PERT/tech.html

___________________
___________________
___________________
___________________
___________________

Project Management & Its Applications

Notes
___________________
___________________

http://filebox.vt.edu/users/sfury/3434/technique.html

182

http://smallbusiness.chron.com/cpm-pert-weaknesses-strengths1082.html

https://www.cs.tcd.ie/~yoonj/Teaching/ST4004/CPM_Reading3.pdf

___________________

___________________
___________________
___________________
___________________
___________________

(c

)U

___________________

PE

___________________

UNIT 15: Case Study

Unit 15

183

Case Study

Notes

___________________
___________________
___________________

Objectives

___________________
___________________

PE

After analyzing this case, the student will have an appreciation of the
concept of topics studied in this Block.

Case Study: GMRs Terminal 3 for Delhi Airport A Successful


Project Execution Model

)U

This case study discusses the infrastructure deficit in India and


how the country was trying to overcome this problem with the
help of the Public Private Partnership (PPP) model. The case
details the 'Terminal 3 for Delhi Airport' project to explain the
role and importance of PPP in overcoming infrastructure deficit.
It also explains the different features of Terminal 3 (T3) which go
to make it a world class airport terminal. In the end, the case
study covers the limitations of the PPP model. The case study
helps to understand the role of PPP and provides scope for
discussions on how to overcome the limitations of PPP. It also
provides ample scope for discussing how T3 was completed in just
37 months and what the upcoming infrastructure projects can
learn from this project. This case is meant for MBA/MS students
as a part of their Project Management curriculum.
Issues
z

Understand the importance of Public-Private Partnership


initiatives, especially in emerging markets, to bridge the
infrastructure deficit

Understand the salient features of Delhi Airports Terminal 3


(T3) project and analyze all the features that have
contributed to the completion of T3 project in a record 37
months

Discuss and debate what T3s record completion in 37


months means for PPP initiatives and what best practices
this project execution offers for future PPP initiatives in the
infrastructure sector.

(c

On July 14, 2010, the first flight touched down at Indias newly
built Terminal 3 (T3) of Delhi airport, the swankiest and largest
in the country, opening a new chapter in the history of the airport
and the Indian Aviation Industry. It was around 4:40 pm (IST)
when the first commercial flight, the Air India flight from John F
Kennedy International Airport, New York, touched down on the
runway to be greeted by water cannon salutes from both sides.
The 220 passengers and 18 crew members of AI-102 flight were
warmly welcomed by the airport senior officers and staff and
treated as special guests. They posed for media cameras and
Contd...

___________________
___________________
___________________
___________________
___________________

Project Management & Its Applications

___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________

received gifts and certificates for being the first group of


passengers to arrive at T3. Sunil Gupta (Gupta), Director of an IT
firm in New York, who was among the first passengers, said, "The
old terminal was shabby and barely had basic facilities. This one
looks good and is up to international standards".

Notes

Not too long ago, Delhi airport had been known for its poor
management and poor passenger services. Underinvestment in
airport infrastructure since independence was a major cause for
concern. Lack of funds and the expertise to develop and maintain
the growing airport infrastructure needs of the country forced the
government to invite private players to participate in
infrastructure development under Public Private Partnership
(PPP). It was in January 2006, that a consortium led by the GMR
Group won the bid to develop the airport. Very soon, the PPP
initiative yielded results, with two terminals being renovated and
one new runway and terminal 1D being opened up for commercial
operation. However, revolutionary change, as the experts called it,
came about when the T3 was inaugurated on July 3, 2010. At the
inauguration of T3, Manmohan Singh (Singh), Prime Minister of
India, said, "The Delhi airport has improved its rank sharply in
terms of Air Service Quality (ASQ) performance, from 101 in 2007
to 21 in 2010. After the opening of this new terminal we are
hopeful that the airport will shortly rank within the first 10
airports of the world."

PE

184

About GMR Group

(c

)U

GMR Group (GMR), a Bengaluru, India-based leading


Infrastructure group, had a stake in almost all types of
infrastructure development activities including power, road,
airport, and Urban Infrastructure. GMR was one of the first
companies in India to take the initiative in infrastructure projects
when they were thrown open to the private sector in the 1990.
PPPS in Indias Infrastructure Development
Public Private Partnership (PPP) was a positive and sustainable
solution to overcome infrastructure deficit, analysts said. The
PPP model aimed at shifting the responsibility for financing,
development.
GMRs T3 & Dial

Analysts cited GMRs T3 terminal as one of the successful PPP


initiatives which had been completed significantly before the
scheduled time on the occasion of its grand opening.
The Limiting Factors
Experts stated that T3 would serve as an example for upcoming
infrastructure projects. However, a few critics stated that the PPP
model only provided profits to the private players through deals.
Question:
Analyse the Case and discuss the case facts.

Source: http://www.icmrindia.org

UNIT 16: Project Control

185

Notes

___________________
___________________
___________________
___________________

PE

___________________
___________________
___________________
___________________
___________________
___________________

(c

)U

BLOCK-IV

186

Notes

Project Management & Its Applications

UNIT
16: PROJECT CONTROL
___________________
z
Introduction
___________________
z
Definition and Importance of Project Controls
___________________
z
Controlling the Projects
z

___________________
Project Control Cycle

z
z
z

___________________
Construction Curves Construction Progress
Control

Introduction

The Estimate

Basic Engineering Cost Control

Equipment Cost Control

Commodities Cost Control

Field Subcontracts Cost Control

UNIT 19: PROJECT CONTROLS TO MINIMIZE


COST AND SCHEDULE OVERRUNS
z

Introduction

Project Dynamics

Rework Cycle

Ripple Effects

Representing the Project Dynamics Feedback


Structure

UNIT 20: CASE STUDY

(c

Introduction
___________________
"S" Curve
___________________
"S" Curve Applications
___________________
Master Project Schedule

)U

UNIT 18: PROJECT COSTS CONTROL

PE

___________________
UNIT 17: CHECKING PROJECT PROGRESS WITH
BELL
AND S CURVES
___________________

Detailed Contents

UNIT 16: Project Control

Unit 16

187

Objectives

___________________

PE

After completion of this unit, the students will be aware of the following
topics:

Project Control

Notes
Activity
___________________
Explain
Project
controls
monitor and adjust the cost,
___________________
schedule
and scope of a
project to ensure that it is
___________________
completed
within budget, on
time and as planned.
___________________

Definition and Importance of Project Controls

___________________

Controlling the Projects

___________________

Project Control Cycle

Introduction

)U

The final management function carried out by the project team is


control, which is discussed in this unit. Control is the process of
monitoring, evaluating, and comparing planned results with actual
results to determine the progress toward the project cost, schedule,
and technical performance objectives, as well as the project's
"strategic fit" with enterprise purposes. The management function
of control may be visualized as distinct steps in a control cycle
model. Monitoring and control are universal activities
indispensable to effective and efficient operation of the control
cycle.

(c

Fayol noted that "to control means seeing that everything occurs in
conformity with established rule and expressed command." Control
is a fact-finding and remedial action process to facilitate meeting
the project purposes. Its primary purpose is not to determine what
has happened (although this is important information), but rather
to predict what may happen in the future if present conditions
continue and if there are no changes in the management of the
project. This enables the project manager to manage the project in
compliance with the plan. The basis of effective project monitoring,
evaluation, and control is an explicit statement of the project
objectives, goals, and strategies which provide performance
standards against which project progress can be evaluated.

Definition and Importance of Project Controls


Project Controls can be defined as Management action, either
preplanned to achieve the desired result or taken as a corrective

___________________
___________________
___________________

Project Management & Its Applications

___________________
___________________
___________________
___________________

measure prompted by the monitoring process. Project controls is


mainly concerned with the metrics of the project, such as
quantities, time, cost, and other resources; however, also project
revenues and cash flow can be part of the project metrics under
control. Thus, we believe an effective Project Controls process can
be applied in a collaboration of its various sub-disciplines, such as:
z

___________________

Notes

Planning, Scheduling & Project Reporting:

___________________

___________________

___________________

___________________

___________________

PE

188

Scope management;

Project deliverables:

Work breakdown/Cost breakdown structures;


Schedule management;
Schedule forecasting;
Corrective action;

Progress measurement/reporting;

Productivity Analysis & Calculation;

Earned Value Analysis & Management

Cost Engineering & Estimating

(c

)U

Estimating;

Cost management;

Cost control;

Cost forecasting

Change Management & Controls

Change order control;

Trend Analysis;

Risk and Delay Claims

Risk Assessment & management;

Delay Claims Quantification

Forensic Schedule Analysis

Put simply, Project Controls encompass the people, processes


and tools used to plan, manage and mitigate cost and schedule
issues and any risk events that may impact a project.

UNIT 16: Project Control

Notes

___________________
___________________
___________________
___________________
___________________

PE

The American Heritage Dictionary defines a project as, an


undertaking requiring concerted effort. That undertaking and
effort explains the need for project control. Even if you are a
certified project manager, how do you choose the right project
controls? Should you use control charts, Pareto or fishbone charts?
How do you ensure the project plan is being followed and what
about setting up a change control process? Do you need all these
project controls?

189

According to the Project Management Body of Knowledge or


PMBOK, project controls are, the process of tracking, reviewing,
and regulating the process to meet the performance objectives
defined in the project management plan. That statement can
mean implementing many different controls to reach your project
goal.

)U

The successful performance of a project depends on appropriate


planning. The execution of a project is based on a robust project
plan and can only be achieved through an effective schedule
control methodology. The development of a suitable project control
system is an important part of the project management effort.
Furthermore, it is widely recognised that planning and monitoring
plays a major role as the cause of project failures.
Despite the continuous evolution in the project management field,
it appears evident that the traditional approach still shows a lack
of utilisation of project controls and there have been a number of
articles published to support the importance of control in the
achievement of project objectives. It has been proved time and
again that Project performance can be improved if dedicated
project controls systems are in place.

Check Your Progress

Fill in the blanks:

and are universal activities


indispensable to effective and efficient operation of the
control cycle.

(c

1.

2.

Project controls is mainly concerned with the metrics of


the .

___________________
___________________
___________________
___________________
___________________

Project Management & Its Applications

Notes
Activity
___________________
Make
a presentation on
application of control of major
___________________
constraints
Time, Cost &
Qualities in any organisation
___________________
of your
choice.

Controlling the Projects

190

___________________

Establishing Tasks/performance standards

___________________

Measure Actual Performance

___________________

Compare the actual performance against the target


(performance standard set for achievement) and find the
duration.

Take appropriate action to see that the/desired result is


achieved. Essence of control systems can be shown by the
Figure 16.1.

___________________
___________________

(c

)U

___________________

PE

___________________

Project controlling should be established as an independent


function in project management. It implements verification and
controlling function during the processing of a project in order to
reinforce the defined performance and formal goals. The
contrariety function basically consists of the following four steps:

Figure 16.1: Graph showing the Controlling of Project

Control of Major Constraints Time, Cost and Qualities


Control systems are needed for cost, risk, quality, communication,
time, change, procurement, and human resources. In addition,
auditors should consider how important the projects are to the
financial statements, how reliant the stakeholders are on controls,
and how many controls exists. Auditors should review the
development process and procedures for how they are
implemented. The process of development and the quality of the
final product may also be assessed if needed or requested. A
business may want the auditing firm to be involved throughout the
process to catch problems earlier on so that they can be fixed more

UNIT 16: Project Control

191
Notes

easily. An auditor can serve as a controls consultant as part of the


development team or as an independent auditor as part of an
audit. Success of project requires control of the abovementioned
factors. A control system controlling Time, Cost and Quality can be
shown as:

___________________
___________________
___________________
___________________

PE

___________________
___________________
___________________
___________________
___________________

)U

___________________

Figure 16.2: Control System

Design of Control System

Design of an integrated control system for time, cost and quality


includes:
Planning Stage: It involves:

WBS: Work break down structure, i.e. breaking the total


project into manageable activities and defining them
clearly.

(c

1.

Fixing sequence & priority.

Estimating the activity duration

Drawing an arrow diagram

Do forward & backward process

Project Management & Its Applications

Construction of network calculations table: identifying


critical activities and determining the critical path.

___________________

Finding floats available

___________________
___________________

Drawing the squared network.

2.

___________________

Scheduling of Resources and Time:

___________________
___________________

___________________

___________________
___________________

Notes

Assess the resources requirement for each activity and


match them with the project estimates.

PE

192

Make overall - master schedule and master budget.


Make time phased construction schedule and integrate the
same with master schedule and master budget.

3.

Organizing of a project team, infrastructures and working


methods.

4.

Budgeting: Make and issue detailed budget and performance


standards and also make cash flow statement to suit
disbursement for supplies & services etc.

5.

Time & Cost Control

___________________

(c

)U

Approaches to Project Control

The following are the key approaches of project control:

Variance Analysis

It involves a comparison of the actual cost incurred on the project


with the budgeted cost of the project for a given time period to
determine the variants. The approach is inadequate for project
control because of following reasons: z

It is backward looking rather than forward looking.

It only indicates budget variance within a given time period


and provides no information on the value of work done on that
period which is vital for integrated project control.

Performance Analysis

The effective control over a project can be exercised by systematic


performance analysis. It provides useful information on variations
in project schedules are cost, whenever they occur indicating
their cause, their implications and fixing responsibility. The
performance analysis provides analytical framework for project
control based on the following terms.

UNIT 16: Project Control

Budgets for all work packages scheduled to be completed,

Budgets for the portion of in - process work scheduled to


be completed,

Budgets for the overheads for the period.

___________________
___________________
___________________
___________________
___________________
___________________

Budgets for work packages actually completed.

___________________

Budgets applicable to the completed in - process work and,

___________________

Overhead budgets

___________________

(c) ACWP (Actual Cost for Work Performed): This represents


actual cost incurred for accomplishing the work performed
during a particular time period.
(d) BCTW (Budgeted Cost for Total Work): This is the total
budgeted cost for the entire project work.

)U

(e) ACC (Additional Cost for Corporation): It represents the


estimate for the additional cost required for completing the
project.
Based on these terms the project control may be exercised based on
the following indices:
Cost Variance

BCWP - ACWP

Schedule Variance

BCWP - BCWS

Cost Performance Index

BCWP/ACWP

Schedule Performance Index

BCWP/BCWS

Estimated Cost Performance Index

(ACWP + ACC)/(BCTW)

(c

Reasons of Over sum of a Project: The various reasons of an


over sum of a project can be started under each phase of the
project.
1.

Notes

PE

(b) BCWP (Budgeted Cost for Work Performed): This is equal


to the sum of three components:

193

(a) BCWS (Budgeted Cost for Work Scheduled): It represents


the total of three components:

Pre-feasibility Study Phase:

Delay in land Acquisition

Delay on Environmental clearance (Pollution Control


Certificate)

Delay by an in complement consultant.

___________________

Project Management & Its Applications

___________________
___________________
___________________

3.

___________________
___________________

Inadequacy of the various requirements.

Poor Technique selection.

Scheduling Phase of the Project:

Delay due to award of contracts.

Delay due to performance of equipment etc.

___________________
___________________
___________________

Detailed Project Study Phase:

4.

2.

Notes

PE

194

Delay during construction & erection work due & poor


planning by contractors.
Delay due to indecisions and delayed decision-making.

___________________

Develop during Start - up Phase: This can happen during


over of the project phase:

___________________

Delay due to design changes

Delay due to absence of commissioning specialties.


Delay due to teething problems resulting from bad
qualities control during construction & erection stages.

General Delays: This can happen during any of the project


phase:

(c

)U

5.

Delay in arranging special tools, manuals, etc.

Weak project team.

Poor quality awareness

Ignorance of second project measurement practices.

Unwarranted enquiries by Government Agencies, etc.

Poor or no M/S system.

It may not be out of place to mention the principal causes of over


causes are management failure and lack of commitment on the
part of executives.

Check Your Progress

Fill in the blanks:


1.

involves a comparison of the actual cost


incurred on the project with the budgeted cost of the
project for a given time period to determine the
variants.

2.

represents the estimate for the additional


cost required for completing the project.

UNIT 16: Project Control

Project Control Cycle

195

Notes
Activity
___________________
Write
a short note on key
steps
to
effective
time
___________________
management.
___________________
___________________
___________________

PE

Unlike the factory-based manufacturing, construction projects


bring the factory to the job site. While pre-manufactured
components are used to create our built environment, putting
these components together must be done at the project location.
Imagine how long it would take to get a new car if you had to
assemble a kit of parts delivered to your front door. You are here;
you know that construction is a complex business.

In the factory it is possible to directly measure the productivity,


quality, and cost of each step of the manufacturing process. On the
construction site we rely on the quality control, quality assurance,
and standard details, and our own experience to ensure that the
job is done to the level of quality identified in the construction
contract. Over time tools have been developed to assist us in these
tasks. These tools are applied as part of control cycles.

)U

Control cycles allow us to define the objective for a specific aspect


of the work, measure against the work as it proceeds, evaluate the
work against the objectives, and then decide if adjustments are
needed to make improvements. Without really thinking about it we
all apply control cycles every time we get behind the wheel of a car.
See if you can identify some of the control cycles that you employ
when driving.

(c

On the construction site we have control cycles that assist in


tracking the cost of a job. There is an initial budget, daily cost
charges, purchase, and we compare the actual cost of the work to
the original budget at least every month when an invoice is
prepared. Each of these steps is needed to track costs through the
project. A contractor who waits until the end of the job to balance
their books is taking a big chance since they will not be able to do
anything if they wait until the end of the job to find out their costs
are exceeding their budget. Trying to control costs without
updating the budget based on job changes, capturing the cost of
work as it is accomplished, and regularly checking the costs,
budget and income is not possible.
Controlling the time required to complete a project using schedules
must also be accomplished using a cycle. An initial schedule allows
us to define a project plan that all team members can understand
and follow. Updated schedules allow us to measure our progress
against that baseline. Updating the baseline for changes to project

___________________
___________________
___________________
___________________
___________________

Project Management & Its Applications

___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________

For your schedule to be effectively used, consider scheduling as a


tool that is part of a time control cycle. If this is the case then, your
initial project plan must clearly communicate the way in which the
project is to be built. You will need to update the plan when the
scope of the project or some other factor impacts your plan. Finally
you will need to use procedures that allow unambiguous progress
measurement.

Steps to Effective Time Management

The steps to effective construction time management are shown in


the list below. Over time, this will include all of these steps.
z

Examine the Contract

List Major Contractual Obligations

Divide Project into Major Work Areas

Building Technology Implies Sequence

Find Productivity, Duration, Cost

(c

)U

___________________

scope is also critical since the plan must represent, as close as is


reasonable, the actual job.

Notes

PE

196

Calculate Initial Schedule

Schedule Adjustments

Resource Evaluation

Time/Cost Trade-off

Total Project Cash Flow

Include All Important Procurement

Check Your Progress

True or False:
1.

ACC represents actual cost incurred for accomplishing


the work performed during a particular time period.

2.

ACWP
represents
actual
cost
incurred
for
accomplishing the work performed during a particular
time period.

UNIT 16: Project Control

Summary

197

Control systems are needed for cost, risk, quality, communication,


time, change, procurement, and human resources. The effective
control over a project can be exercised by systematic performance
analysis. It provides useful information on variations in project
schedules are cost, whenever they occur indicating their cause,
their implications and fixing responsibility. Control cycles allow us
to define the objective for a specific aspect of the work, measure
against the work as it proceeds, evaluate the work against the
objectives, and then decide if adjustments are needed to make
improvements.

Lesson End Activity

)U

How you will design an effective controlling system? Make an


assignment.

Keywords

ACC (Additional Cost for Corporation): It represents the


estimate for the additional cost required for completing the project.
ACWP (Actual Cost for Work Performed): This represents
actual cost incurred for accomplishing the work performed during
a particular time period.
BCTW (Budgeted Cost for Total Work): This is the total
budgeted cost for the entire project work.
Evaluation: It is the comparison of actual results, with
anticipated results on the basis of objectives of an information
organisation

(c

Notes

___________________
___________________
___________________
___________________
___________________

PE

Project controls is mainly concerned with the metrics of the project,


such as quantities, time, cost, and other resources; however, also
project revenues and cash flow can be part of the project metrics
under control. Project Controls encompass the people, processes
and tools used to plan, manage and mitigate cost and schedule
issues and any risk events that may impact a project.

Performance Evaluation: It helps to assess how well a system or


service is working with respect to some predefined measures.
Performance Measurement: It means investigating and
measuring how well an operational system meets the needs of its
users.

___________________
___________________
___________________
___________________
___________________

Project Management & Its Applications

Notes
___________________
___________________

Productivity: It is the ratio of net outputs to inputs.

198

Variance Analysis: It involves a comparison of the actual cost


incurred on the project with the budgeted cost of the project for a
given time period to determine the variants.

___________________

Questions for Discussion

___________________

1.

Define Project Controls. What is the importances of Project


Controls?

2.

Project controlling should be established as an independent


function in project management. Discuss.

3.

Explain the concept of controlling of project with the help of


graph presentation.

4.

Discuss the design of control system.

5.

What are the important approaches of project control?

6.

Briefly explain the project control cycle.

___________________
___________________
___________________
___________________
___________________

PE

___________________

(c

)U

Further Readings
Books

Clements/Gido, Effective Project Management, Thomson.


Clifford F. Gray and Erik W. Larson, Project Management, Tata
McGraw Hill.
Dennis Lock, Project Management, Ninth Edition, Gower.

K. Nagarajan, Project Management, Third Edition, New Age


International.
Prasanna Chandra, Projects-Planning, Selection, Financing,
Implementation and Review, Sixth Edition, Tata McGraw Hill.
P.C.K. Rao, Project Management and Control, Sultan Chand &
Sons.
Vasant Desai, Project Management, Second Revised Edition,
Himalaya Publishing House.

UNIT 16: Project Control

Web Readings

199

Notes

www.projectsmart.co.uk

___________________

www.projectmanagement.com

___________________

www.pmearth.com
http://www.brighthubpm.com/risk-management/69114-the-needfor-project-control-why-bother/

___________________
___________________

PE

___________________
___________________
___________________
___________________
___________________

(c

)U

___________________

Project Management & Its Applications

200

Notes
___________________
___________________
___________________

___________________
___________________
___________________
___________________
___________________

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)U

___________________

PE

___________________

UNIT 17: Checking Project Progress with Bell and S Curves

Unit 17

201

After completion of this unit, the students will be aware of the following
topics:
\

"S" Curve

"S" Curve Applications

Master Project Schedule

Construction Curves Construction Progress Control

Introduction

)U

In a project, many planning and scheduling problems are


quantitative. For example, 8000 isometrics must be produced in 5
months or 50,000 tons of fabricated piping must be erected over the
same period. In these cases, it does not really matter which
isometrics are produced or which piping is erected during a specific
period. The important thing is to know that the job is being
handled quantitatively at a rate appropriate for the time span in
order to achieve overall project schedule. This is where "S" and Bell
curves can be valuable tools to the more complex systems of
evaluation. They can be developed rapidly and have great
flexibility in their application.

"S" Curve

A basic "S" curve (Figure 17.1) is drawn on a grid with a horizontal


axis showing percentage calendar time from 0 to 100% and a
vertical axis showing percentage completion from 0 to 100%. Any
activity, group of activities, or overall project expressed in the form
of "S" curve must start at 0, 0 in the bottom left hand corner and to
be complete, must end at top right hand corner at 100, 100. The
shape of the curve between 0 and 100% can be an indicator of
comparative performance and efficiency.

(c

Objectives

___________________

PE

Checking Project Progress with


Bell and S Curves

Notes
Activity
___________________
Make
a spreadsheet for the
engineering planned progress
and___________________
man-hour expenditure
(discipline wise) on the basis
___________________
of the
engineering schedule.
Draw corresponding S and
___________________
Bell
curves.

The simplest "S" curve can be a straight line as shown in Figure


17.1, curve A. An "S" curve shows cumulative values from 0 to 100

___________________
___________________
___________________
___________________
___________________

Project Management & Its Applications

___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________

(c

)U

___________________

and its slope shows the rate of progress or loading at each point of
time. In reality, it is rarely feasible to apply full loading instantly
and to maintain a constant load throughout the time span.
Usually, there must be an initial lead-in period for initial
mobilization before peak effort can be applied and a tail-off period
towards the end. Curve B in Figure 17.1 shows a typical,
symmetrical "S" curve which has an equal build up and tail-off. "S"
curves are not usually symmetrical. They may be front end loaded
or back end loaded as illustrated in curves C and D in Figure 17.1.
An actual "S" curve might follow any shape within the grid but will
probably fall between the extremes of the two curves shown. The
closer the "S" curve is to the 45 degree straight line, the greater is
the degree of resource levelling that has been achieved and greater
the theoretical efficiency.

Notes

PE

202

Figure 17.1: Basic Bell and "S" Curve Shapes

The Bell curve is derived from the "S" curve and shows the amount
of vertical movement of the "S" curve (the rate of progress or
loading) for a finite time. In the case of the straight line "S" curve,
the slope or loading is constant indicating a constant effort
throughout the total period. Thus, the derived Bell curve is also a
straight line. This shape of the curve is normally the most efficient

UNIT 17: Checking Project Progress with Bell and S Curves

Check Your Progress


Fill in the blanks:
1.
2.

203

Notes
Activity
___________________
Prepare
a weighted progress
(planned) S curve for any
one___________________
engineering discipline of
your project.
___________________
___________________
___________________

PE

and hence the most desirable when related to manpower loading. It


may not necessarily be so for dollar expenditures where it may be
more desirable to defer expenditure to the latest possible date. The
loading curve developed from a symmetrical "S" curve shows the
conventional Bell shape with a symmetrical peak considerably
higher than the average. This indicates a lower rate at the
beginning and end with the maximum rate during the central
period.

___________________
___________________

An curve shows cumulative values from


0 to 100.

___________________

The curve is derived from the "S" curve


and shows the amount of vertical movement of the "S"
curves (the rate of progress or loading) for a finite time.

___________________

"S" Curve Applications

)U

"S" curves are generally applied to the following areas of the


project:
z

Engineering by man-hour or by physical completion

Drawings by number or weighted values

Requisitions by number or dollar value

Purchase orders by number or dollar value

Construction by man-hour, by units of work activity, or by


physical completion

Expenditure or cash flows in dollars

These curves can be applied equally effectively to a variety of


miscellaneous activities or items such as:
Material take-off quantities

Isometrics drawn and checked

Cubic meter of earth excavated

Cubic meter of concrete placed

Meter of pipe erected

Meter of cable laid

(c

___________________

Project Management & Its Applications

___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________

Engineering Curves Engineering Progress Control

Figure 17.2 contains a tabular spreadsheet distributing


engineering planned progress and man-hour expenditures by
discipline from project start to mechanical completion. The Figures
show the per cent man-hours expended and progress achieved in
each period and cumulatively. Superimposed on the spreadsheet is
the same information expressed in the form of "S" and Bell curves.
Notice how much greater is the visual impact and information
given in the curves than by the Figures.

(c

)U

___________________

The most common "S" curves used for overall project review are for
engineering, procurement, material delivery and construction.

Notes

PE

204

Figure 17.2: Typical Curves of Engineering Work

In a normal project, the work flows through process, equipment


groups (stationary and rotary), civil & structural, plant design and
finally, instruments and electrical. This typical relationship
between the "S" curves for the various engineering disciplines
holds for most projects. If the progress for any one discipline runs
late, then all the succeeding disciplines must be affected and will

UNIT 17: Checking Project Progress with Bell and S Curves

205
Notes

also be forced to run late. If planned man-hour and progress curves


are prepared at the start of a project and actual man-hour
expenditure and progress recorded at each reporting date, any
deviation from plan is immediately visible. Even more important,
schedule slippages in one area can be easily trended to evaluate
the potential impact on the schedule of other areas.

___________________
___________________
___________________
___________________
___________________

PE

Individual Discipline Curves

(c

)U

Figure 17.3 shows individual discipline curves plotted over the


scheduled completion time for the discipline. In these curves, 100%
completion refers to completion of schedulable activities within the
scheduled completion time for the discipline. For engineering
disciplines, this is normally at a point when 90 to 95% man-hours
have been spent. The final 5 to 10% of the man-hours are required
for engineering closeout and follow-up of vendor and field queries.
Basically, three typical curve shapes cover all engineering
disciplines.

Figure 17.3: Contrast in Normal and Unacceptable


Engineering Curve Shapes

___________________
___________________
___________________
___________________
___________________

Project Management & Its Applications

___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________

Generally speaking, a planned "S" curve for any engineering and


drafting disciplines will fall somewhere within this envelope. For
preliminary planning purposes, this typical shape of "S" curve can
be assumed for man-hour, manpower and progress planning. Note
that the "S" curves produce the corresponding Bell curves where
the peak is about 1.5 times the average.

Unsuitable Curves

Figure 17.3 also includes curve shapes that are unacceptable for
engineering disciplines. Curve A in Figure 17.3 is too steep and too
early. It shows an unrealistic peak of 2.5 times the average with a
long slow tail-off. Curve B shows two steep portions with a central
flat area. The derived Bell curve shows two short term peaks with
low progress achievement over the central portion of the project.
These curve shapes show inefficient manpower loading. If they
were produced, either planned or actual, there is something
seriously wrong with project planning or performance.

(c

)U

___________________

Figure 17.3, curve 1, shows a fast build up, early peak which
applies for process, mechanical and equipment disciplines. Figure
17.3, curve 2, shows a normal build up with a long even peak
which applies for project and support engineering disciplines.
Figure 17.3, curve 3 shows a slow build up and late peak which
applies to the major drafting disciplines.

Notes

PE

206

Plan, Measure, Report


Figure 17.4 illustrates the method of preparing a planned,
weighted progress "S" curve for an engineering discipline for
comparison against physical achievement and man-hour
expenditure. First list the activities and estimate the man-hours
for these activities. The "weight" of an activity is the ratio of
activity man-hours to the total discipline man-hours expressed as a
percentage. Next prepare a bar chart schedule showing the
planned periods for the activities. The planned percentage
completion for each activity at each reporting period is marked
above the bar. The planned weighted percentage completion is the
multiple of the activity per cent complete times the activity
weighting. The vertical totals of each reporting period generate a
weight per cent planned progress "S" curve as illustrated. At the
time when the planned "S" curve is prepared, the Bell curve
generated should also be examined. This will show the planned
man-hour and manpower expenditure for each reporting period.

UNIT 17: Checking Project Progress with Bell and S Curves

207
Notes

Any excessive peaks or fluctuations should be corrected by


adjusting the bar chart schedule to achieve more even loading.

___________________

Periodic Recording

___________________
___________________
___________________
___________________

)U

PE

At each reporting period, physical completion for each activity is


recorded. This physical per cent completion is multiplied by the
activity weighting. The sum of these multiples gives the total
physical percentage completion for the over-all discipline. Physical
completion and man-hour expenditure are plotted on the same
form with the planned progress curve. A comparison between the
planned per cent completion, the physical per cent completion
and the per cent man-hour expenditure will quickly show the
productivity and performance trend. It is then possible to forecast
overall completion and overall man-hour expenditure. This method
of developing planned progress "S" curves is a basic method. Many
variations can be done manually or by computers with networks
and/or bar-charts.

Figure 17.4: Curves for a Weighted Progress Report

(c

Manpower Forecasting

Figure 17.5 shows how curves can be used to forecast manpower


requirements. Normally, the planned progress curve is prepared
after the manpower requirements have been determined and
levelled to even out peaks. However, sometimes during the
progress of a job, when the end date has been fixed, and the
progress and man-hour expenditure have varied from the initial

___________________
___________________
___________________
___________________
___________________

Project Management & Its Applications

___________________

plan, it is necessary to re-determine the manpower requirements


to meet the original schedule. The steps are as follows:
1.

The current position is the end of the actual progress curve,


assuming the method of measuring physical per cent
completion is realistic.

2.

From this point, extend a revised planned progress curve


approximating to the shape of the previous planned "S" curve
and meeting the required completion point.

3.

Note the cumulative per cent completion required at the end of


each month on the revised planned progress curve.

4.

Tabulate for each reporting monthly period the required per


cent to be completed per month which is the difference
between cumulative numbers noted under 3.

5.

To predict the number of men required per month, take the


total forecast hours based upon productivity and performance
to date. Multiply the total hour by the per cent to be completed
per month and divide it by the hours worked per month. This
will give the number of men required per month.

___________________
___________________
___________________
___________________
___________________
___________________
___________________

Notes

___________________

(c

)U

___________________

PE

208

Figure 17.5: Manpower Forecasting from Curves

UNIT 17: Checking Project Progress with Bell and S Curves

Confirm that the number of men indicated can be realistically


applied to the job. If the number indicated is greater than can
be obtained or realistically applied to the job, then the
schedule will have to be extended. Alternatively, if more men
are available and can be applied to the job than is required, it
may be possible to reduce the schedule.

Check Your Progress


Fill in the blanks:
1.

2.

In curves, refers to completion of


schedulable activities within the scheduled completion
time for the discipline.

The final 5 to 10% of the are required


for engineering closeout and follow-up of vendor and
field queries.

)U

Master Project Schedule

Figure 17.6 shows a typical bar chart master project schedule.


Start/complete dates and relationships between the various major
activities are expressed as a percentage of calendar time to
mechanical completion.

(c

209
Notes
Activity
___________________
Draw
up Master project
schedule and S curves for
your___________________
project.

7.

Review the number of men required thus calculated and even


out the numbers if there are large differences on a month to
month basis.

___________________
___________________
___________________

PE

6.

Figure 17.6: Typical Master Project Schedule and Curves

___________________
___________________
___________________
___________________
___________________

Project Management & Its Applications

___________________
___________________
___________________
___________________
___________________
___________________

Superimposed on the bar chart are "S" curves for procurement,


engineering, material delivery and construction, which are
normally considered the key progress measurement curves for an
overall project. The relationship between the "S" curves matches
the relationship between the corresponding activities in the bar
chart. Whereas the bar chart shows the specific start and finish
dates for the activities, the "S" curves show required rate of
progress and cumulative completions at various stages of the
project.

Notes

PE

210

___________________

A Narrow Band

___________________

The shape of the "S" curves, their relationship to each other and
their position with regard to overall project completion fall within
a fairly narrow band for all projects. For example, procurement,
engineering and material delivery all should be complete at the
50%, 70% and 80% points respectively.

___________________

(c

)U

___________________

Figure 17.7: Curves Showing Relationship between Drawing


Start/AFC and Engineering Progress

Little is to be gained by starting construction much earlier than


the 30% point. If anyone of these curves moves significantly out of
its place, then the overall schedule will be affected. The typical
relationship between these "S" curves and their position in the
overall project completion provide excellent data for preliminary

UNIT 17: Checking Project Progress with Bell and S Curves

Notes

___________________
___________________
___________________
___________________
___________________

PE

As the project proceeds, the actual number of starts and AFC


issues can be entered and compared against the plan. This simple
but effective method helps assure that overall drawing progress is
maintained to meet the requirements of the project schedule.
Figure 17.7 shows the drawing summary schedules (in heavy solid
line) superimposed on the engineering curves for the drafting
disciplines (refer Figure 17.2). Note that the engineering discipline
progress curves fall right between the drawing start and drawing
AFC "S" curves. This is where these should be.

211

planning. Also the curves help to check the realism of any detailed
plans developed for a specific project.

___________________
___________________
___________________

Unacceptable Curves

Figure 17.7 also shows unacceptable drawing curves (in heavy


dotted line) in relation to the drafting discipline progress curves.
The following points are unacceptable:
The drawing start curve is too optimistic. Drawing starts
should not be made too early and too fast. Progress cannot be
maintained since it runs well ahead of the engineering
development.

2.

The drawing AFC curve is too late. This is running too far
behind the planned progress.

3.

There is too wide a gap between the drawing start and the
drawing AFC curve in the early phases. This means the
drawings are started and left incomplete for too long. This
usually reflects inefficient operation.

4.

The end portions of the curves are too close showing an


unrealistic expectation. Drawings cannot be started and issued
AFC without adequate time in between for the actual drawing,
checking, review and finalizing before issue.

5.

The average slope of the drawing curves from start to finish is


offset from the required engineering discipline progress curves.
In general, the rate of progress of the drawing production has
to be equal to or greater than the overall engineering progress
curves.

(c

)U

1.

The correct relationship between an engineering discipline


progress curve and its drawing start and drawing AFC curves is
illustrated in the insert. Entirely similar type of curves can be
generated for equipment requisitions, purchase orders and

___________________
___________________

Project Management & Its Applications

___________________
___________________

deliveries. Again, the requisitions and purchase order curves must


have a fixed relationship, one to the other and also to the progress
of the engineering discipline.

Check Your Progress


Fill in the blanks:
1.

___________________
___________________
___________________
___________________
___________________

2.

The relationship between the "S" curves matches the


relationship between the corresponding activities in the
.
Little is to be gained by starting construction much
earlier than the percent point.

Construction Curves Construction Progress Control


Figure 17.8 shows typical construction craft "S" and bell curves.
The actual shape of construction "S" and Bell curves differs from
those of the engineering disciplines.

(c

)U

___________________

Notes
Activity
___________________
Draw
construction craft S
and Bell curves for your
___________________
project.

PE

212

Figure 17.8: Construction Craft Curves

Nevertheless, the overall concept for their preparation and


application is entirely similar. In a normal project, construction

UNIT 17: Checking Project Progress with Bell and S Curves

Notes

___________________
___________________
___________________
___________________
___________________

PE

This typical relationship between the "S" curves for various


construction crafts holds for most projects. If progress for any craft
runs late, then all succeeding crafts will be affected and will also
be forced to run late. Planned man-hour and progress curves may
be prepared at the start of the project against which actual manhour expenditure and progress achieved can be recorded for
schedule control and forecasting.

213

work flows through concrete, steel, equipment, piping and


electrical as shown.

Plan and Track

___________________
___________________

In just the same way as there is a relationship between the


equipment and drawing curves and engineering progress curves,
there is a similar relationship between the construction progress
curves. Construction cannot proceed until the AFC drawings and
materials are received.

)U

A good way of planning and monitoring construction schedule is to


plot the AFC drawing release and equipment delivery "S" curves
with the corresponding construction craft curve. Good planning
allows an adequate lead time between receipt of AFC drawings and
material and planned construction progress. Therefore, if a record
is maintained of the actual AFC drawing releases and actual
material deliveries, it is possible to determine ahead of time
whether or not construction progress can be maintained. Any
deviation from plan immediately shows up the potential effect on
the subsequent activities.

Simple but Useful

The difficulties of plant construction today demand that the most


appropriate of the available comprehensive specialized control
systems be used. However, simple Bell and "S" curves can be
applied in conjunction with such systems. These are effective tools
for top management to junior supervisors.

(c

Check Your Progress

Fill in the blanks:


1.

This typical relationship between the "S" curves for


various holds for most projects.

2.

The difficulties of plant construction today demand that


the most appropriate of the available comprehensive
specialized systems be used.

___________________
___________________
___________________

Project Management & Its Applications

___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________

Summary

Notes

This unit highlights the use of Bell and S curves in project


progress monitoring. Sufficient information is given for the
preparation, analysis and use of these curves. Unacceptable shape
of these curves with reasons for their unacceptability has been
discussed. Midstream corrections for change in manpower
deployment in order to achieve the desired project schedule have
also been described.

PE

214

Lesson End Activity

Draw the desirable S curve and corresponding Bell curve for


your project and make an analysis of the resource deployment
required to achieve these curves.

Keywords

"S" Curve: A basic "S" curve is drawn on a grid with a horizontal


axis showing percentage calendar time from 0 to 100% and a
vertical axis showing percentage completion from 0 to 100%.

(c

)U

Bell Curve: The Bell curve is derived from the "S" curve and
shows the amount of vertical movement of the "S" curves (the rate
of progress or loading) for a finite time.
Engineering Curves: It contains a tabular spreadsheet
distributing engineering planned progress and man-hour
expenditures by discipline from project start to mechanical
completion.
Individual Discipline Curves: It shows individual discipline
curves plotted over the scheduled completion time for the
discipline.
Isometrics: A system of physical exercises in which muscles are
caused to act against each other or against a fixed object.
Manpower Forecasting: The process of calculating how many
employees will be needed in the future, and how many will actually
be available.
Unacceptable Curves: It shows unacceptable drawing curves
(in heavy dotted line) in relation to the drafting discipline progress
curves.
Unsuitable Curves: It includes curve
unacceptable for engineering disciplines.

shapes

that

are

UNIT 17: Checking Project Progress with Bell and S Curves

Questions for Discussion

215

What is 'S' curve and in which area of project this is mostly


used?

2.

What are individual discipline 'S' and Bell curves?

3.

How these curves help in monitoring and control of major


activities/area of work?

5.

6.

___________________
___________________
___________________
___________________

Describe various types of Bell and S curves and their


significance. How can these curves be used for project progress
monitoring?

___________________

Describe various types of S curves as applicable to


engineering disciplines. What types of curves are unacceptable
and why?

___________________

PE

4.

Notes

1.

Describe how manpower redeployment can be calculated using


the S curves when the actual progress does not match the
planned progress.

Books

)U

Further Readings

Clements/Gido, Effective Project Management, Thomson.


Clifford F. Gray and Erik W. Larson, Project Management, Tata
McGraw Hill.
Dennis Lock, Project Management, Ninth Edition, Gower.
K. Nagarajan, Project Management, Third Edition, New Age
International.
Prasanna Chandra, Projects-Planning, Selection, Financing,
Implementation and Review, Sixth Edition, Tata McGraw Hill.

(c

P.C.K. Rao, Project Management and Control, Sultan Chand &


Sons.
Vasant Desai, Project Management, Second Revised Edition,
Himalaya Publishing House.

___________________
___________________

___________________
___________________

Project Management & Its Applications

___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________

http://www.forecastingnet.com/Alert_0212_34-39.pdf
http://www.seecore.org/d/2007_02t.pdf

http://www.12manage.com/description_s_curve.html

http://www.growthdynamics.com/articles/FROM%20MY%20PERSPECTIVE.htm

(c

)U

___________________

Web Readings

Notes

PE

216

UNIT 18: Project Costs Control

Unit 18

217

___________________

Objectives

The Estimate

Basic Engineering Cost Control

Equipment Cost Control

Commodities Cost Control

Field Subcontracts Cost Control

___________________
___________________

PE

After completion of this unit, the students will be aware of the following
topics:
\

Project Costs Control

Notes
Activity
For ___________________
your project, calculate
the percentage cost (of the
___________________
total)
for various elements.

___________________
___________________
___________________
___________________
___________________

Introduction

)U

The first step in cost control is to prepare a good cost estimate.


Cost cannot be controlled if there is an inadequate, incomplete or
unrealistic estimate.

The Estimate

An order of magnitude estimate is derived from curves or returns


costs from previous projects and is prepared in the conceptual
stage.
A preliminary control estimate is prepared when the process
design is complete and equipment data and sizes are available.
A definitive estimate is prepared when basic engineering is
complete and preliminary bulk material take-offs have been
prepared.

(c

A detailed or check estimate is prepared on completion of design


engineering when production drawings, final material quantities
and prices are known.

Variations

The last two stages that the final cost of a project is not known
until financial completion, when all commitments and invoices
have been paid. Prior to that there is always the possibility of
variation from an estimate no matter how detailed. Normally,
three levels of estimates are prepared during project execution:

218
Notes

Order of magnitude

Preliminary control

Definitive

___________________

___________________
___________________
___________________
___________________
___________________
___________________

Cost control can only be applied at a level corresponding to the


quality and detail of the estimate available.

Project cost control starts on a wrong base if there is a poor


estimate. Estimates may be arbitrarily reduced or an estimating
accuracy may be claimed which is not supported by the project
scope definition available. Poor project execution may be blamed
for cost overrun when an unrealistic or overoptimistic project
estimate is the problem.

PE

___________________

___________________

Procedures

An essential requirement for the production of quality estimates


is the use of good estimating procedures. Detailed formalized
procedures, consistency of method, feedback of previous cost data
and a standard code of accounts are the prime requisites for project
estimating. Project costs must be reported under the same code of
accounts to match the estimate to ensure good feedback for
comparison.

(c

)U

___________________

Project Management & Its Applications

Table 18.1 shows the major elements of capital cost in a project.


Although cost control procedures should be applied to all areas of
cost, knowledge of cost elements will allow additional vigilance to
be applied to cost sensitive areas. No matter how thorough the
estimate, there may be errors, omissions and unforeseen events. A
contingency and risk analysis (as described above) of the estimates
takes care of these situations. An appropriate contingency is
included as an integral part of the estimates.
Table 18.1: Elements of Capital

Cost in a Project

% of Total
Low

Typical

High

Home office

10

12

Equipment

20

30

40

Commodities

25

31

40

Direct labour

15

20

25

12

Construction
Indirects
Total

100

UNIT 18: Project Costs Control

Fill in the blanks:

2.

A estimate is prepared when the process


design is complete and equipment data and sizes are
available.
control starts on a wrong base if there is
a poor estimate.

Notes
Activity
List ___________________
out the methods of
controlling engineering cost.
___________________
___________________
___________________
___________________

PE

1.

219

Check Your Progress

___________________

Basic Engineering Cost Control

The intrinsic cost of a project is set in the basic engineering phase,


during which the following major project definition documents are
produced:
Project scope definition and coordination procedures

Process design package

General engineering specifications

Equipment list and equipment data

Piping and instrument diagrams (process and utility)

Site and plot plans

Electrical single line diagrams

Construction plan

Master project schedule

)U

Cost Influence

(c

Basic engineering fixes the quality and content of the project which
in turn, fixes the basic cost. Such things are the equipment, the
material and design specifications, philosophies regarding
reliability, spares, safety, environmental protection, automation
and controls, extent of buildings and structures, etc. which are
fixed. After basic engineering has been fixed, the only
opportunities for cost savings are by improved project execution
efficiency and productivity in engineering and construction or by
more competitive equipment and material purchasing. These are
called Economic Value Addition (EVA) methods.
Significant costs are saved only by reducing the scope of the project
by removing equipment items or using less stringent design and

___________________
___________________
___________________
___________________

Project Management & Its Applications

Notes
Activity
List___________________
the steps you will take to
control the construction cost of
___________________
your
project.
___________________

material specifications. Because the project costs are committed


after basic engineering has been approved, there should be a
thorough cost review prior to approval. It should be a separate
exercise from the technical review, to ensure that extra cost has
not been built in unnecessarily.

220

Check Your Progress

___________________

Fill in the blanks:

___________________

1.

___________________

2.

___________________
___________________
___________________

PE

___________________

The intrinsic cost of a project is set in the basic


phase.
Significant costs are only by reducing
the scope of the project by removing equipment items or
using less stringent design and material specifications.

Equipment Cost Control

(c

)U

Equipment items are normally estimated with close accuracy


provided the basic capacity, duty, materials, and type have been
defined. Often there may be large price differences between bids.
Careful commercial and technical analysis must be made to ensure
that acceptable quality is selected at the lowest price to take
advantage of specific market conditions. A major problem in
controlling equipment costs is to stop price additions after the
purchase order has been placed. Changes, such as nozzle sizes,
ratings, orientations, attachments, instrument and electrical
connections etc. provide the vendor with an opportunity to increase
his price unless fixed unit prices for additions have been
established during the competitive bidding stage.

Control Equipment Costs


The following general rules should be part of the project
procedures to control equipment costs:
z

Do not issue enquiries prematurely. Wait until equipment


definition is firm so that vendors can bid on information which
will not change.

Obtain competitive bids from at least three vendors. Search


the market ahead of time to determine which vendor shops are
hungry for work.

UNIT 18: Project Costs Control

Obtain firm price quotations. If escalation clauses are


unavoidable, specify an escalation formula which can be
monitored and also relates to the required delivery.
If nozzles or attachments may be added or changed, obtain
fixed unit prices for these additions prior to the placement of
purchase order.

If spares are required, obtain firm price quotations with the


bid or before placement of purchase order.

Check Your Progress


Fill in the blanks:
1.

2.

are normally estimated with close


accuracy provided the basic capacity, duty, materials,
and type have been defined.

provide the vendor with an opportunity


to increase his price unless fixed unit prices.

Commodities Cost Control

)U

Commodities or bulk materials include:


z

Civil, structural and building materials;

Piping, valves, fittings, supports and associated materials;

Electrical equipment and materials;

Instruments and instrument materials;

Insulation, fireproofing, painting.

The cost of commodities is set by quality and quantity. Quality is


set by specifications developed during basic engineering by the
size, type and number of pieces of equipment, piping and
instrument diagrams, plot plan and plant general arrangement.
When engineering is complete, the base cost of commodities has
also been established, even though at that point in the project
execution the exact commodity quantities may not be known.
Thereafter it is only possible to reduce wastage, excesses or
inefficiencies by good control during design engineering,
procurement and construction.

(c

Notes
Activity
For ___________________
effective cost control,
establish
the
stage
of
___________________
engineering
completion at
which the Bill of Quantities
___________________
(BOQ)
should be available
more or less precisely for the
___________________
following
commodities:
(a) ___________________
Foundation for
steel/rebars
(b) ___________________
Structural steel

PE

221

Document Review

In order to reduce the base cost of commodities, it is necessary to


review the basic engineering documents so as to reduce quality of

(c) ___________________
Piping and piping
specialties
___________________
(d) Instruments
(e) ___________________
Electrical cables
___________________

Project Management & Its Applications

___________________
___________________
___________________
___________________
___________________

specifications, remove unwanted equipment, or remove extra


piping and instruments. This reinforces the importance of a
specific cost review of the key basic engineering documents prior to
the start of production design. Economic value addition is done
through this review and could lead to substantial cost saving of the
project. Approval of basic design is a commitment for the quality
and quantity of commodities required by the approved basic
engineering documents.

Notes

PE

222

___________________

Control Commodity Quantities

___________________
___________________

The following general rules should be observed to achieve effective


control of commodity quantities:

___________________

Prepare a detailed commodity material estimate and make


this available to those responsible for final design drawings
and bills of material.

Estimate takeoff quantities must be referenced to specific


equipment items, P&Ids, pipeline numbers, plot plan area
numbers, or other suitable identification so that it is possible
to make comparisons during the progress of design
engineering. The drawings used for takeoff should be retained.

(c

)U

___________________

Since the estimate takeoffs are based upon designs which are
not final, appropriate allowances must be added to the
estimate takeoff to cover final design, construction and
maintenance spares. Allowances must be identified. Unit
prices used in the estimates must also be recorded.

As design proceeds, final takeoff quantities by area or system


should be compared against the takeoff quantities of the same area
or system in the estimate.

Commodity Price Control


Commodity price control can be achieved by the following:
z

Obtain at least three competitive quotes. Review the market


ahead of time to determine which suppliers need work.

Do not issue enquiries until specifications and quantities are


firm so that there is no chance for the bidder to change his
price after the purchase order has been placed.

Attempt to obtain fixed price quotes or fixed unit prices. Do


not accept escalation clauses or other price adjustment
clauses, which cannot be easily monitored.

UNIT 18: Project Costs Control

Do not place orders which are open ended or where the


fabricator can invoice according to his measurements. This
particularly applies to pipe fabrication.

Home Office Costs

___________________

___________________

Salaries and benefits of home office personnel (engineering,


procurement and support services).

___________________
___________________

PE

Notes

___________________

Home office costs include the following:


z

223

Home office overheads for accommodation, facilities and nonchargeable support staff.

___________________

Home office expenses such as documentation costs (stationary,


reproduction, etc.), communications, travel, business expenses
and computer time.

___________________

Of the above, major cost is the salaries of the home office


personnel. This cost can be controlled if the hours chargeable to the
project can be controlled.

Home Office Cost Control

)U

The first step towards cost control is to prepare a man-hour


estimate for each discipline. These man-hour estimates must
identify the number of activities to be performed in terms of
number of equipment items, requisitions, drawings, bill of
quantities etc. The better the quality of man-hour estimates,
the better the opportunity for comparing physical progress and
man-hour spent against the original plan and budget. During
project execution, there should be continuous monitoring of manhour expenditure, relating this to the progress achieved and the
budget. A particular problem is the "90% syndrome" where
progress and expenditure reports are favourable until 90%
completion is reached, at which time the last 10% creates a
considerable overrun in man-hours and schedule time.

(c

Check Your Progress

Fill in the blanks:


1.

is set by specifications developed


during basic engineering by the size, type and number
of pieces of equipment.

2.

is done through this review and could


lead to substantial cost saving of the project.

___________________

___________________
___________________

Project Management & Its Applications

___________________

Field Subcontracts Cost Control


The organization and planning of field subcontracts must occur
during the engineering and procurement phase prior to start of
work in field. The following are some general guidelines for
controlling or reducing subcontract costs:
z

Pre-select subcontractors to whom enquiries will be issued on


the basis of their past performance, work experience and
capability.

Do not issue subcontract inquiries prematurely. Be sure that


the inquiry documents are complete and final, cover the scope
of work, and fully define the subcontractor's responsibilities.

Check that the inquiry puts the responsibility on the


subcontractor to familiarize himself with site conditions and
for movement and removal of materials and labour.

Do not impose schedule start and completion dates on


subcontractor which are dependent upon completion of work
by others without provision for adjustment prior to the start of
work without cost penalty.

___________________
___________________
___________________
___________________
___________________

Notes
Activity
List___________________
out the field sub-contracts
required for your project and
give___________________
specific proposals for
cost control of each.
___________________

___________________

PE

224

Attempt to obtain lump-sum quotations when scope definition


is firm. Do not attempt to obtain lump-sum quotations with an
inadequate definition or if the work may be changed. In either
case obtain a full scale of unit rates to allow for additions and
extension.

After receipt of bids, have meeting with recommended


subcontractor and review with him the total scope of work to
be sure that he understands and accepts it before the contract
is awarded.

(c

)U
z

Optimum Project Schedule


There is an optimum project schedule which is the most efficient
and which will yield the lowest cost. Any period below this
optimum period may result in cost increase due to the following:
z

Equipment and materials purchased for shortest delivery and


not lowest cost.

Extra men employed in engineering and/or construction to


reduce time at the expense of efficiency.

Overtime hours worked requiring overtime premium.

UNIT 18: Project Costs Control

Arbitrary decisions made in the interest of speed without


proper analysis of the cost impact on engineering and
construction.

Check Your Progress


Fill in the blanks:
1.

2.

The organization and planning of field


must occur during the engineering and procurement
phase.
There is an optimum project schedule which is the most
efficient and which will yield the cost.

Summary

)U

This unit provides the basic concepts for project cost control at
Engineering, Procurement and Construction stages. Cost control at
engineering stage is carried out by correct estimates of bulk
materials (commodities) and avoiding over design of equipment.
Methods of cost control during construction and cost control of
subcontracts have been emphasized. The role of project changes in
cost over-runs has been described and a control suggested.

Lesson End Activity

What means you would like to adopt for controlling equipment cost
of your project

Keywords

(c

Notes

___________________
___________________
___________________
___________________
___________________

PE

Although a reduction in the project schedule below the optimum


may increase the capital cost, it may not increase the total cost to
the owner. The increase in cost to reduce the construction period
may be more than recovered by the reduced interest on capital and
the earlier earnings generated.

225

Cost Control: The process or activity on controlling costs


associated with an activity, process, or company.

Definitive Estimate: A definitive estimate is prepared when basic


engineering is complete and preliminary bulk material take-offs
have been prepared.

___________________
___________________
___________________
___________________
___________________

Project Management & Its Applications

___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________

Detailed or Check Estimate: A detailed or check estimate is


prepared on completion of design engineering when production
drawings, final material quantities and prices are known.

Notes

Equipment: Tangible property (other than land or buildings) that


is used in the operations of a business.

Order of Magnitude Estimate: An order of magnitude estimate


is derived from curves or returns costs from previous projects and
is prepared in the conceptual stage.

PE

226

Preliminary Control Estimate: A preliminary control estimate


is prepared when the process design is complete and equipment
data and sizes are available.
Variations: Inevitable change in the output or result of a system
(process) because all systems vary over time.

Questions for Discussion

Project success depends upon accuracy of cost estimate'.


Substantiate this by suitable example.

2.

Explain the basic engineering cost control.

(c

)U

1.

3.

How project cost control can be exercised through:


(a) Engineering of project.
(b) Procurement of materials & equipment.
(c) Planned optimized construction.
(d) Project monitoring & control.

4.

From your experience, list out the reasons of cost overruns.


What should have been done to avoid these cost over-runs?

5.

What innovative methods you would like to suggest for


Construction cost control? Give reasons.

6.

Briefly discuss about field subcontracts cost control.

Further Readings
Books

Clements/Gido, Effective Project Management, Thomson.


Clifford F. Gray and Erik W. Larson, Project Management, Tata
McGraw Hill.

UNIT 18: Project Costs Control

K. Nagarajan, Project Management, Third Edition, New Age


International.
Prasanna Chandra, Projects-Planning, Selection, Financing,
Implementation and Review, Sixth Edition, Tata McGraw Hill.

Notes

___________________
___________________
___________________
___________________
___________________

PE

P.C.K. Rao, Project Management and Control, Sultan Chand &


Sons.

227

Dennis Lock, Project Management, Ninth Edition, Gower.

Vasant Desai, Project Management, Second Revised Edition,


Himalaya Publishing House.

___________________

Web Readings

___________________

http://www.tutorialspoint.com/management_concepts/project_cost_
control.htm

http://www.jasonowens.com/wpcontent/uploads/2009/12/ProjectCostControlTools_and_Techniques.
pdf

)U

http://pmbook.ce.cmu.edu/12_Cost_Control,_Monitoring,_and_Acco
unting.html
http://www.pmipr.org/html/Presentaciones/cost_Management.pdf

(c

https://www.e-education.psu.edu/geog584/l6_p6.html

___________________

___________________
___________________

Project Management & Its Applications

228

Notes
___________________
___________________
___________________

___________________
___________________
___________________
___________________
___________________

(c

)U

___________________

PE

___________________

UNIT 19: Project Controls to Minimize Cost and Schedule Overruns

Unit 19

229

Project Controls to Minimize Cost


and Schedule Overruns

Notes
Activity
___________________
Collect
recent updates on
Project Dynamics.
___________________
___________________
___________________

After completion of this unit, the students will be aware of the following
topics:
\

Project Dynamics

Rework Cycle

Ripple Effects

Representing the Project Dynamics Feedback Structure

Introduction

)U

Development projects are notorious for over-running their cost and


schedule budgets. Many factors can contribute to poor project cost
and schedule performance including definition and selection,
preproject planning, and project execution. For example, in project
planning infeasible deadlines or budgets or exogenous changes
which increase the work required to fulfil requirements can
prevent good performance. While proper project selection and
planning can address many downstream issues that can cause poor
project performance, managers often have to address problems
that arise during project execution. During project execution
managers can use several project controls to address poor project
performance. As used here project controls are managerial
decisions and actions intended to correct poor project performance
during project execution. Project controls can include process
improvements,
adjusting
performance
targets,
change
management, and resource management. The current work
focuses on resource management, specifically labour resource
management, because labour project controls can cause many
significant unintended negative side effects.

(c

___________________

PE

Objectives

Project Dynamics

Typical project dynamics are illustrated in Figure 19.1. The project


staffing plan builds up to a peak, and then gradually declines. But,

___________________
___________________
___________________
___________________
___________________

Project Management & Its Applications

___________________
___________________
___________________
___________________
___________________
___________________
___________________

more commonly, the actual ramp up of staff is delayed, then


staffing levels overshoot the planned peak and extend longer
(sometimes with a second peak). While the planned fraction
complete grows linearly or with a slight s-shape, actual fraction
complete is often below planned levels, and plateaus for a period of
time before rising to completion. On some projects, fraction
complete may cross a tipping point and begin to decline. Several
system dynamics researchers have documented these and other
consistent behaviour modes in actual projects. What causes these
dynamics? In this section we discuss the contribution of different
types of drivers to the basic theory of these project dynamics.

Notes

PE

230

___________________
___________________
___________________

(c

)U

Source: https://ceprofs.civil.tamu.edu/dford/dnf%20profesional/ProjectControlModelSDConf2007.pdf

Figure 19.1: Typical Project Dynamics

An underlying theory of the basic structures that create typical


project behaviour has emerged from system dynamics work on
projects. There are four basic types of drivers generate these
dynamics:
1.

A rework cycle in which undiscovered errors in current work


are later discovered and reworked, potentially cycling again
through this process as errors are made in correcting rework;

2.

Controlling (negative or balancing) feedback loops through


which management attempts to bring a project which has
fallen behind schedule, or over budget, back on track (e.g.
adding staff, working overtime, exerting schedule pressure), or
adjusts the targets (e.g. increasing deadlines or reducing
scope);

3.

Ripple-effects, the primary positive or re-enforcing feedbacks


vicious circles which circumvent project control efforts (e.g.
skill dilution from hiring staff; fatigue from overtime; haste
makes waste from schedule pressure);

UNIT 19: Project Controls to Minimize Cost and Schedule Overruns

Secondary or knock-on effects, within or between phases of


work, caused by processes that produce excessive or
detrimental concurrence of upstream and downstream (e.g.
errors on errors feedback, unresolved problems in design
create problems in construction), or human factors that
amplify the negative effects via channels such as morale.

Check Your Progress


Fill in the blanks:

Notes
Activity
___________________
Make
an assignment on
Rework Cycle.
___________________
___________________
___________________
___________________

PE

We next describe these structures in more detail.

231

4.

___________________
___________________

1.

The project staffing plan builds up to a peak, and then


gradually .

___________________

2.

On some projects, fraction complete may cross a


and begin to decline.

___________________

Rework Cycle

)U

At the heart of all project dynamics are the processes which


describe the accomplishment of work, and as importantly, rework.
Figure 19.2 shows the fundamental components and relationships
of the rework cycle employed in this research. The basic structure
is based on previous system dynamics research. The rework cycle
represents five stocks of work. At the start of a project or project
phase all work resides in the stock Initial Completion Backlog.
As the project evolves, work is accomplished by applying effort
(staff-hours) working at varying productivities, thereby depleting
the pool of original work and increasing the two Quality Assurance
(QA) backlogs. A certain fraction of the work being done at any
point in time contains errors that is, it is of less than perfect
quality. Work that is done correctly enters the stock QA Backlog
Correct Work, and requires no rework (unless later changes
obsolete that work).

(c

However, work containing errors enters a stock of QA Backlog


Incorrect Work. Errors are not immediately recognized, but are
detected as a result of doing QA work. Work completed incorrectly
flows into the stock Rework Backlog. The fraction of rework
performed incorrectly is assumed to equal the fraction of initial
work performed incorrectly. Correct rework increases the QA
Backlog Correct Work; incorrect rework increases QA Backlog
Incorrect Work. As a result, tasks can make several iterations
through the rework cycle.

___________________

Project Management & Its Applications

___________________

RW resource
rate

RW process
rate

Notes

Rework
Backlog

Rework Rate

___________________
___________________

___________________
___________________
___________________
___________________
___________________
___________________

<QA % correct>

QA % correct

Correct

QA Backlog
Error
-- Correct
Fraction
Work

Work
Approve Work Released
Rate

PE

___________________

QA Backlog
-- Incorrect
Work

Discover
Rework Rate

<QA rate>

Incorrect

232

Incorrect.

Initial
Completion
Backlog

Initially Complete
Work Rate

IC process rate

Correct.

QA process
rate

QA rate

QA resource
rate

IC resource rate

Source: https://ceprofs.civil.tamu.edu/dford/dnf%20profesional/ProjectControlModelSDConf2007.pdf

Figure 19.2: The Rework Cycle

Controlling Feedbacks

(c

)U

While the rework cycle in itself creates project dynamics as a


result of the cycling of tasks containing errors, management
actions to control a project to its cost, schedule, and quality
objectives can also create errors. When actual progress suggests
that performance at milestone events such as project completion
will not meet objectives, actions are taken to bring the project back
on line. There are two basic strategies, as illustrated in Figure
19.3: (1) improve performance by increasing or changing project
effort, or (2) adjusting performance targets. Both strategies use
negative feedback loops to close the gap between targets and
forecasted performance. Examples of adjusting targets toward
expected performance (right loop in Figure 19.3) include slipping
deadlines, reducing scope, and the delivery of projects with defects.

Source: https://ceprofs.civil.tamu.edu/dford/dnf%20profesional/ProjectControlModelSDConf2007.pdf

Figure 19.3: A Generic Structure of Controlling Feedback


(Assumes Smaller is Better)

UNIT 19: Project Controls to Minimize Cost and Schedule Overruns

233

Notes

___________________
___________________
___________________
___________________
___________________

PE

While project performance targets can be adjusted, they are often


inflexible. For example, time to market is often the primary
project objective (e.g. to meet an annual release date, an
announced product launch, to gain a first mover advantage, or the
desire to beat competitors to market). Therefore, typically the first
(and often only) response to forecasted underperformance is to
adjust project efforts (the left loop in Figure 19.3) to bring a
projects progress back toward the targeted performance. Human
self interest certainly encourages this bias for improving
performance over shifting targets nobody wants to admit they
cant get the job done on schedule and in budget.

(c

)U

We use improving schedule performance in the current work to


illustrate controlling feedback structures because schedule
performance has been a particular focus of many system dynamics
project models. Why does a project fall behind schedule? There
are many possible triggers: (1) the scope could have been
underestimated or increased because of customer requests;
(2) customers can request changes in the design or project
requirements during the course of a project which cause completed
work to require rework; (3) the original plan may have been
infeasible (e.g. understaffed, too aggressively scheduled, or failing
to take rework into account); or (4) other risks might have
occurred, such as lack of staff due to hiring delays or delayed
completion of upstream projects. Whatever the cause, resource
management actions are often taken during the project (i.e. project
controls) to correct the short-fall including working faster
(increasing work intensity), working more hours (overtime), and
adding people (increasing work force) as illustrated in Figure 19.4.
These actions form negative feedback loops. If work remaining is
more than can be completed in the time remaining labour
resources needed exceed resources currently on hand. Overtime
might then be increased, which increases the effective workforce
(as the number of full time equivalent developers or FTEs) and
effort applied on the project. With more effort, work progress
increases, which causes the project backlog6 (the dashed line in
Figure 19.4) to decrease faster than they otherwise would have,
thereby reducing work remaining faster than time remaining, and
reducing, if not eliminating, the staff shortage. The Work Faster
and Add People loops work similarly to this Work Harder loop,
i.e. by increasing the effective workforce.

___________________
___________________
___________________
___________________
___________________

Project Management & Its Applications

234

Staff

Notes
Activity
___________________
Prepare
a
presentation
showing the Ripple Effects.
___________________

Resources
Applie d
+
<Rework Rate.>

___________________

Overtime

Add Pe ople

Work M ore

+
<QA Rate.>

___________________

Work
Intensity

+
<Initially Complete
Work Rate.>

Rework Rate

Rework
Backlog

PE

___________________

Work Faster

Correct

Incorrect

___________________

QA
QA Backlog
--- Incorrect Backlog
Correct
Work
Work

Discover
Rework Rate

___________________

Work
Approve Work Released
Rate

Resources
Needed
+
-

<QA rate>

Incorrect.

___________________

Initial
Completion
Backlog

___________________
___________________

Correct.

Time Remaining

QA rate

Initially Complete
Work Rate

Project Backlog
+

Source: https://ceprofs.civil.tamu.edu/dford/dnf%20profesional/ProjectControlModelSDConf2007.pdf

(c

)U

Figure 19.4: Controlling Feedback Loops for Improving


Schedule Performance

Check Your Progress

Fill in the blanks:


1.

The rework cycle represents of work.

2.

Work completed incorrectly flows into the stock


.

Ripple Effects

Ripple effects are the primary impacts of controlling feedback on


rework and productivity. Unfortunately, actions taken to close a
gap between project performance and targets have unintended side
effects that generate policy resistance. As illustrated in Figure
19.5, which builds on the controlling feedbacks shown in Figure
19.4, these effects typically operate by increasing rework or
reducing productivity. Each of the three primary forms of
improving schedule performance (add staff, overtime, and press for
greater output) can cause policy resistance. For example, adding
staff can dilute experience as staff with less skill and/or less
familiarity with the project are added and they require experienced

UNIT 19: Project Controls to Minimize Cost and Schedule Overruns

235
Notes

developers to divert time to training instead of development. This


reduces productivity and increases errors. This results in slower
progress and increased rework.

___________________
___________________

Staff

___________________

+
+ +

Overtime

+
+
- Productivity

Rework
Backlog

+
Rework Rate

Correct

QA
QA Backlog
--- Incorrect Backlog
Correct
Work
Work

<QA rate>
Incorrect.
Initial
Completion
Backlog

___________________

Initially Complete
Work Rate

___________________

___________________
___________________

___________________

Work Faster

Work
Approve Work Released
Rate

)U

Correct.

Add Pe ople

Work M ore
Work
Intensity
+

+
<Initially. Complete
+
Work Rate>
QA rate

Incorrect

Discover
Rework Rate

PE

Error Fraction

Resources
Needed
+
-

Time Remaining

Project Backlog
+

Source: https://ceprofs.civil.tamu.edu/dford/dnf%20profesional/ProjectControlModelSDConf2007.pdf

Figure 19.5: Policy Resistance via Ripple effects of Rework and


Controlling Feedback to Improve Schedule Performance

(c

This increases work remaining, resulting in an increase staff


demand. Additional staff is then added, further diluting
experience. This cycle represents a positive feedback loop. The
impact of increasing staff on rework is temporary as the new
workers gain experience and the rework ripple effects decrease
(Figure 19.6). Using overtime to improve schedule performance can
(after a delay) cause developers to burnout due to fatigue from
sustained overtime, increasing error fraction and reducing
productivity (Figure 19.6). Pushing developers for more output can
cause a haste makes waste dynamic which immediately increases
errors produced on the project (Figure19.6). All of these forms of
policy resistance create positive feedback loops, or vicious circles,
which can cause a project to spin out of control.

___________________
___________________

Project Management & Its Applications

236

PE

Notes
Activity
___________________
Present
drafts of written
assignments
on
Project
___________________
Dynamics
Feedback Structure
and then revise the drafts
___________________
which
are based on other
student comments. Groups for
this___________________
activity should not be too
large.
___________________
___________________
___________________
___________________
___________________
___________________

Source: https://ceprofs.civil.tamu.edu/dford/dnf%20profesional/ProjectControlModelSDConf2007.pdf

Figure 19.6: Impacts of Overtime (OT), Workforce Size (WF), and Work
Intensity (WI) on Rework due to a Step increase in the Required
Effective Workforce

Knock-on Effects

(c

)U

In addition to ripple effects, secondary (and tertiary) feedbacks


emanate from the actions and reactions of project managers. Many
feedbacks are a consequence of physical processes related to work
flow through projects that propagate from upstream work to
downstream work, both within a phase of work (e.g. design), and
between phases of work (e.g. from design to construction), while
others are human reactions to project conditions such as
purposefully hiding rework needs.

Check Your Progress

Fill in the blanks:


1.

effects are the primary impacts of


controlling feedback on rework and productivity.

2.

Using overtime to improve schedule performance can


cause developers to due to fatigue from
sustained overtime, increasing error fraction and
reducing productivity.

Representing the Project Dynamics Feedback


Structure
For the first iteration of this research, we start with a simplified
version of the rework cycle, negative feedback loops capturing all

UNIT 19: Project Controls to Minimize Cost and Schedule Overruns

237
Notes

three project control actions, and one ripple effect feedback


through error fraction for each management action. These
structures are described in more detail below.

___________________
___________________

Project Workflow Sector

___________________
___________________
___________________

)U

PE

The workflow sector of the model simulates the completion of work


required to complete the project. Work flow through the project is
measured in units of tasks. Conceptually a development task is
an atomic unit of development work. Examples of development
tasks include the selection of a pump, writing a line of computer
code, and installing a steel beam. We assume tasks within a phase
are uniform in size and are fungible. This assumption becomes
more accurate as task size decreases. Therefore relatively small
pieces of development work are selected as tasks. Fungible tasks
are characteristic of some development project phases (e.g. the
delivery and placement of soil for a roadbed). Many other
development phases have interdependent but fungible tasks. Tasks
are also assumed to be small enough to either require a change or
be correct but not require a partial change. The rework cycle used
in this first analysis iteration is a slightly expanded version of that
shown in Figure 19.2. Work flows among the stocks as shown in
Figure 19.2 and as described above. The initial completion, quality
assurance, and rework flows are constrained by either
development processes or available resources. Development
process constraints are based on the backlogs of available work
and minimum task durations this defines the process rate for
each type of work.

Project Controls Sector

(c

We model three project resource controls that are commonly


available to management: (1) exert pressure to increase progress
(work intensity); (2) have developers work overtime (average
workweek); and (3) hire additional staff. As illustrated in Figure
19.7, the actions are based on the effective workforce8 deficit,
which is the difference between the current effective workforce and
the required effective workforce to complete the project by the
deadline. The required effective workforce is the required work
effort (in person-weeks) divided by the time remaining until the
deadline. Estimated work remaining is determined by the project
scope less work released and the portion of the QA work which is
correct and will not need additional work. The required effort is the

___________________
___________________
___________________
___________________
___________________

Project Management & Its Applications

Notes

work remaining (in tasks) divided by the resource productivity (in


tasks/personweek).

___________________

238

Fraction of Defic it To
Be Filled By
Workw eek

Average
Workweek +

Target Average
Workweek
+

___________________

Productivity

Effort Applie d
+

___________________

Work
Accomplished

___________________

Fraction of Def ic it To
Be Filled By Workf orce

Project
Workforce

Target
Workforce Size

Work Intensity

___________________
Rework
Backlog

___________________
___________________

Target Work
Intensity

Rework Rate

Incorrect.

Initial
Completion
Backlog

Effective WF
Available

Effective WF
Deficit

Fraction of Defic it To
Be Filled By Intensity

QA
QA Backlog
--- Incorrect Backlog
Correct
Work
Work

Discover
Rework Rate

QA Resource
Rate

QA Process
Rate

Correct

Incorrect

___________________
___________________

PE

___________________

Rework
Rework
Process Rate Resource Rate

Work
Approve Work Released
Rate

Effective WF to
Complete on Time
+ -

Correct.

Initially Complete
Work Rate

IC Resource
Rate

Time Available

IC Process Rate

Estimated Work
Remaining
+

Project Scope

Figure 19.7: Management Actions Determined by


Work and Time Remaining

(c

)U

While the diagram in Figure 19.7 illustrates the complexity of the


ripple and knock-on effects of management actions, in an effort to
limit model complexity we have simplified the effects of project
controls to impacts on the error fraction as shown in Figure 19.8.
Fraction of Def icit To
Be Filled By
Workweek

Errors from
Overtime

Average
Workweek +

Productivity

Error Fraction

Rework
Backlog

Initial
Completion
Backlog

+
Target
Workforce Size
Work Intensity

Target Work
Intensity

Rework Rate

Correct

QA
QA Backlog
--- Incorrect Backlog
Correct
Work
Work

+
Incorrect.

Fraction of Def icit To


Be Filled By Workforce

Project
Workforce

Rework
Resource Rate

+
Incorrect

Discover
Rework Rate

Work
Accomplished

Errors from Work


Intensity

Rework
Process Rate

Effort Applie d
+

+ + +

Target Average
Workweek
+

Errors from
Workforce

Base Project
Error Fraction

QA Process
Rate

QA Resource
Rate

Effective WF
Available
-

Fraction of Def icit To


Be Filled By Intensity

Work
Approve Work Released
Rate

Effective WF
Deficit
+

Effective WF to
Complete on Time
+ -

Correct.

Initially Complete
Work Rate
IC Resource
Rate

Time Available

IC Process Rate

Estimated Work
Remaining
+
Project Scope

Figure 19.8: Management Action Create Ripple Effects through


Error Fraction

UNIT 19: Project Controls to Minimize Cost and Schedule Overruns

Expert project manager assumption (manager immediately


recognizes changes in rework, scope changes, project progress,
accurately forecasting resource needs, accurately measuring
error fractions, etc.);
Project controls cannot be reduced below their initial values;
and

Notes

___________________
___________________
___________________
___________________
___________________

PE

239

Additional assumptions of the project controls model sector


include:

Project deadline is exogenous and fixed.

___________________
___________________

Check Your Progress


Fill in the blanks:
1.

Work flow through the project is measured in units of


.

2.

Development process constraints are based on the


backlogs of available work and minimum task
durations which defines the .

)U

Summary

(c

The project staffing plan builds up to a peak, and then gradually


declines. While the planned fraction complete grows linearly or
with a slight s-shape, actual fraction complete is often below
planned levels, and plateaus for a period of time before rising to
completion. An underlying theory of the basic structures that
create typical project behaviour has emerged from system
dynamics work on projects. At the heart of all project dynamics are
the processes which describe the accomplishment of work, and as
importantly, rework. Errors are not immediately recognized, but
are detected as a result of doing QA work. Work completed
incorrectly flows into the stock Rework Backlog. Ripple effects
are the primary impacts of controlling feedback on rework and
productivity. The workflow sector of the model simulates the
completion of work required to complete the project. Work flow
through the project is measured in units of tasks.

Lesson End Activity

Critically analyse the cost and time control of construction


projects.

___________________
___________________
___________________

Project Management & Its Applications

___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________

Keywords

Notes

Errors: Belief or mental state that does not conform to objective


reality; where what is correct is actually incorrect and what is
incorrect is actually correct.
Overruns: Instance of something exceeding an expected or allowed
time or cost.

Rework Cycle: It accounted to a large degree for the success or


failure of a development effort.

PE

240

Ripple Effects: Ripple effects are the primary impacts of


controlling feedback on rework and productivity.
Workflow: The sequence of industrial, administrative, or other
processes through which a piece of work passes from initiation to
completion.

Questions for Discussion

Discuss the impacts of Project Controls on tipping point


dynamics.

2.

What are the four basic types of drivers generate dynamics?

3.

Define Rework Backlog.

4.

Highlight the two basic strategies of controlling feedbacks.

5.

Explain the impacts of overtime, workforce size, and work


intensity on rework.

6.

Elucidate the Project Workflow Sector.

7.

Describe with the help of diagram the Management action


create ripple effects through error fraction.

(c

)U

1.

Further Readings
Books

Clements/Gido, Effective Project Management, Thomson.


Clifford F. Gray and Erik W. Larson, Project Management, Tata
McGraw Hill.
Dennis Lock, Project Management, Ninth Edition, Gower.

UNIT 19: Project Controls to Minimize Cost and Schedule Overruns

Prasanna Chandra, Projects-Planning, Selection, Financing,


Implementation and Review, Sixth Edition, Tata McGraw Hill.
P.C.K. Rao, Project Management and Control, Sultan Chand &
Sons.

Web Readings

Notes

___________________
___________________
___________________
___________________
___________________

PE

Vasant Desai, Project Management, Second Revised Edition,


Himalaya Publishing House.

241

K. Nagarajan, Project Management, Third Edition, New Age


International.

___________________
___________________

https://ceprofs.civil.tamu.edu/dford/dnf%20profesional/ProjectContr
olModel-SDConf2007.pdf

___________________

http://www.assakkaf.com/Courses/ENCE%20302/Lectures/Chapter
11.pdf

___________________

http://www.systemdynamics.org/conferences/2011/proceed/papers/P
1293.pdf

)U

http://www.techrepublic.com/blog/10things/10-ways-to-effectivelyestimate-and-control-project-costs/1059

http://www.westney.com/publications/Offshore%20Tech%20Confer
ence/Managing%20the%20Cost%20and%20Schedule%20Risk%20of
%20Offshore%20Development%20Projects.pdf

(c

http://eprints.aston.ac.uk/15566/2/Cost_and_time_control_inhibiting
_factors_and_mitigating_measures.pdf

___________________

Project Management & Its Applications

242

Notes
___________________
___________________
___________________

___________________
___________________
___________________
___________________
___________________

(c

)U

___________________

PE

___________________

UNIT 20: Case Study

Unit 20

243

Case Study

Notes

___________________
___________________
___________________

Objectives

___________________
___________________

PE

After analyzing this case, the student will have an appreciation of the
concept of topics studied in this Block.

___________________

Case Study: Project Failures from the Top Down Can


Marchionne Save Chrysler?

___________________

When Chrysler merged with Fiat on June 10, 2009, there was
cause for hope and optimism. After an endless string of bad news,
perhaps, the auto industry was not dead yet.
On paper it looked like a good deal for everyone. Fiat would
return to the US market and sell its popular 500 (Cinquecentro),
Chrysler would acquire a line of cars that consumers might
actually buy, and tens of thousands of workers would keep their
jobs.
But the real prize might just be Sergio Marchionne, CEO of Fiat
and now CEO of FiatChrysler.

)U

When he first became CEO of Fiat in 2004, Marchionne inherited


a company on the brink of failure. It manufactured a lackluster
product line and had suffered more than $12 billion in losses over
the previous five years.
To transform the company he embarked on several strategic and
operational projects. He fired senior managers, upended a bloated
bureaucracy, and brought a team of young aggressive managers
on board. Then, he reviewed all projects and killed those that
could not pass the market test. And he hired new designers, and
demanded a portfolio of exciting projects that would bring
customers back to dealer showrooms.
In less than three years he succeeded in one of the most
impressive turnarounds in automotive history.

(c

Now, as part of his plan to grow Fiat into a global competitor he


has taken on Chrysler. But, can he perform his magic again? Can
he save yet another company whose circumstances in many ways,
but not all, are strikingly similar to those faced by Fiat just five
years ago? Can his leadership style as well as the Fiat 500 be
successfully exported to the other side of the Atlantic?
If we look at Marchionne's record by itself, not only is it
impressive, but it suggests that he might be the right person at
the right time. But, before we can reach this conclusion, his
ability to succeed must be considered in the context of what has
happened to Chrysler in the last decade. In that case, success may
not be assured.
Contd...

___________________
___________________
___________________

Project Management & Its Applications

___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________

DaimlerChrysler

Notes

In May 1998, Daimler-Benz merged with Chrysler. Jurgen


Schrempp, CEO of Daimler-Benz, called it a "merger of equals."
Robert Eaton, CEO of Chrysler, promised that "within five years
we will be among the Big Three automotive companies in the
world." Even bringing together two companies from Europe and
the United States was not considered a hurdle; Robert A. Lutz,
Vice-Chairman of Chrysler, argued that there was "definitely no
culture clash here."
But behind this display of public enthusiasm and corporate
kinship, Schrempp took complete control and his actions made it
clear that this was indeed no "merger of equals." Eaton responded
by deferring to Schrempp, often retreating to the safety of his
office in Auburn Hills; his top managers responded by defecting to
Ford and General Motors. Soon Chrysler was rudderless, projects
were lackluster, and within just a few years not only was the
product line in trouble but the merger was too. While there were
many reasons for its failure, the one most frequently cited was a
clash of corporate cultures.

PE

244

Cerberus

(c

)U

In 2007 DaimlerChrysler sold Chrysler to Cerberus Capital


Management, a private equity firm with no experience in making
cars. Bob Nardelli, former CEO of Home Depot, was chosen to
head the company. For many, it was clear that the deal was
strictly financial and few believed that Cerberus was committed
to building a competitive company in an increasingly competitive
auto industry plagued with too much capacity.
Nardelli was a "tough-as-nails" CEO. Business Week, in August
2007, said that he "alienated ... virtually all of the management
he inherited." While many thought that his military style was
exactly what Chrysler needed, it didn't work. In that Business
Week article, a University of Michigan Professor, Gerald Meyers,
said that Cerberus had the right idea, but Nardelli was the
"wrong guy."
Then, Chrysler was hit by the perfect storm. Oil rose to over $140
per barrel, the economy went into a tailspin, and Chrysler was
caught with a product line dominated by gas guzzlers no one
wanted to buy.
Marchionne's Challenge
It is within this context that Fiat has taken a 20 percent stake in
Chrysler. Marchionne inherits an organisation shattered by the
distant, yet dominant, style of Schrempp and the "tough-as-nails"
style of Nardelli. He inherits a workforce that has endured job
losses, pay cuts, deterioration in benefits, and the anxiety of an
uncertain future. But above all, he inherits a workplace that has
suffered one lackluster project after the other, and a project
culture that has failed to stress markets not methodology.
Here is the problem; his leadership style, characterised by the
quick and disruptive changes he made five years ago, may not be
very different from the leadership style practiced by his two
predecessors at Chrysler.
Contd...

UNIT 20: Case Study

Or, will he be the third in a string of tough CEOs and continue


with the beatings until the morale at Chrysler improves?
Question:

Notes

___________________
___________________
___________________
___________________
___________________

PE

Is he flexible enough to become the transformational leader that


Chrysler so desperately needs or will he ignore Chrysler's rough
ride over the last ten years, grab the reins, ignore the cultural
differences, and simply repeat history? Can he be tough on the
problems but at the same time restore morale and create a
project-based environment that motivates not alienates its project
teams?

245

But he must be different if he is to succeed in making sustainable


changes.

Analyse the case and discuss the case facts.

Source: http://www.projectsmart.co.uk/project-failures-from-the-top-down-can-marchionnesave-chrysler.html

___________________
___________________
___________________
___________________

(c

)U

___________________

Project Management & Its Applications

246

Notes
___________________
___________________
___________________

___________________
___________________
___________________
___________________
___________________

(c

)U

___________________

PE

___________________

UNIT 21: Project Procurement Management

247

Notes

___________________
___________________
___________________
___________________

PE

___________________
___________________
___________________
___________________
___________________
___________________

(c

)U

BLOCK-V

248

Notes

Project Management & Its Applications

UNIT
21: PROJECT PROCUREMENT
___________________
MANAGEMENT
___________________
z
Introduction

Detailed Contents

UNIT 23: ATTRIBUTES OF A GOOD PROJECT


MANAGER
z

Introduction

___________________
Meaning and Concept of Project Procurement

Creative Endeavour

Planning for Procurement


___________________
Evaluating Assumptions, Constraints, and Other
___________________
Factors

Authority and Responsibility

The Right to Lead and Style of Management

PE

___________________
UNIT 22: EVALUATING BIDS FOR MAJOR
EQUIPMENT
___________________

Preliminary Evaluation

Technical Evaluation

Commercial Evaluation

Pre-award Meetings

Conditioning of Bids

Vendor Selection

Pre-commitment Meeting

Awarding the Order

(c

Discreet Use of Power and Experience Requirement

Planning, Scheduling and Decision Making

Knowing the People

UNIT 24: MODERN TRENDS


z

Introduction

Project Management Software

Project Software Evaluation

Project Engineering

Project Construction

UNIT 25: CASE STUDY

)U

Introduction
___________________
Pre-select Vendors
___________________
Prepare Inquiry
___________________
Receive Bids

UNIT 21: Project Procurement Management

Unit 21

249

Objectives

___________________
___________________

PE

After completion of this unit, the students will be aware of the following
topics:

Project Procurement Management

Notes
Activity
___________________
Write
a short note on six
processes widely recognised
by ___________________
the project management
industry.
___________________

Meaning and Concept of Project Procurement

___________________

Planning for Procurement

___________________

Evaluating Assumptions, Constraints, and Other Factors

Introduction

)U

Procurement management involves getting work done by people


outside the project team. Project procurement management
includes administering contracts and change control process to
manage contracts or purchase orders. Projects routinely require
procurements. Projects need materials, equipment, consultants,
training, and many other goods and services. Project procurement
management is the process of purchasing the products necessary
for meeting the needs of the project scope. Procurement
management involves planning, soliciting sources, choosing a
source, administering the contract, and closing out the contract.

Procurement management focuses on the practices from the


buyers point of view, not the sellers. The seller can be seen as a
contractor, subcontractor, vendor, or supplier. When buying
anything from a vendor, the buyer needs a contract. A contract
becomes a key input to many of the processes within the project.
The contract, above anything else, specifies the rules and
agreements for the project.

(c

Meaning and Concept of Project Procurement


Project procurement involves a systematic process of identifying
and procuring, through purchase or acquisition, necessary project
services, goods, or results from outside vendors who will carry out
the work. It is usually a function of the project manager; however,
some organizations choose to select a person other than the project
manager to handle these duties. Project procurement is not an
exact science. Although this process is generally accepted within

___________________
___________________
___________________

Project Management & Its Applications

___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________

There are six processes widely recognized by the project


management industry as integral to project procurement
management.

The first of these processes is planning purchases and acquisitions.


In this step, needs that require outsourcing are identified. Sources
for obtaining the required goods, services or results are
differentiated through a market analysis. In planning the
procurement, project objectives are reviewed to ensure the
acquisition does not stray from the stated objectives. Completion of
this step includes identification of the resources necessary for the
acquisition, determination of the contract type needed to secure
the acquisition, and preparation of a procurement management
plan.
Contract planning, requesting seller responses and selecting the
seller are the next three processes that might be completed. In
contract planning, it is necessary to describe in detail the products
or services requested. Requests for proposals and bids should be
documented to avoid problems.

(c

)U

___________________

the industry, actual execution may differ between organizations.


Many courses are available that teach the strategies used by
project procurement managers. Community colleges and extended
education departments of universities often provide classes on this
subject.

Notes

PE

250

When requesting seller responses and proposals, specific vendors


are identified and placed on a qualified sellers list. Selected
vendors are considered qualified based on their ability to provide
the goods or services considering the constraints of the project,
their interest in providing the goods or services, and the
reasonableness of their bids. Once the prospective sellers have
been set apart, the proposals of the selected sellers are evaluated
in order to determine the best vendor to deliver the goods or
services. After the sellers are chosen, contracts are negotiated.
Administering contracts is critical to project procurement duties.
Clearly outlining the obligations, responsibilities, and performance
goals is essential to completing this step. Satisfactory performance
of the contract entails tracking the execution of stated goals. At
times, the project procurement manager may need to correct
processes in order to obtain the desired results. Contract changes
should be controlled and documented to prevent unnecessary legal
claims.

UNIT 21: Project Procurement Management

Fill in the blanks:


1.

2.

Notes
Activity
Find___________________
out the sources that are
available to provide the
___________________
needed
products or services
for your project.
___________________
___________________
___________________

PE

Check Your Progress

251

Once the contract is complete, the final step is to close the contract.
The contract is audited to make certain all terms of the contract
were fulfilled. Contract closure involves evaluating the
performance of vendor and documenting any lessons learned in
executing the contract.

When requesting seller responses and proposals,


are identified and placed on a qualified
sellers list.
contracts is critical to project procurement
duties.

___________________
___________________
___________________
___________________
___________________

Planning for Procurement

)U

Procurement planning is the process of identifying which part of


the project should be procured from resources outside of the
organization. Generally, procurement decisions are made early on
in the planning processes. Procurement planning centres on four
elements:
z

Whether or not procurement is needed

What to procure

How much to procure

When to procure

Referring to the Scope Statement

(c

The projects scope statement serves an input to making


procurement decisions. Because the project scope statement
defines the project work, and only the required work, to complete
the project, it also defines the limitations of the project. Knowing
these limits of what the project includes can help the project
manager, the contract specialists, or other procurement
professional, determine what needs to be purchased and what does
not.

Referring to the Product Description


The product description defines the details and requirements for
acceptance of the project. This information also serves as valuable

Project Management & Its Applications

___________________
___________________
___________________
___________________
___________________
___________________

input to what needs to be procuredand to what does not. The


product description defines what the end result of the project will
be. When dealing with vendors to procure a portion of the project,
the work to be procured must support the requirements of the
project customer. A Statement of Work (SOW) may define the work
to be accomplished within the project, but it generally does not
define the product description as a whole. However, when an entire
project is to be procured from a vendor, the SOW and the product
description become one and the same.

Notes

PE

252

___________________

Relying on Procurement Resources

___________________

Often an organization will have resources for managing the


procurement process, including contracting and negotiating on
behalf of the project. If, however, the performing organization has
no such resources for the project manager to rely upon, then it is
up to the project manager to supply the procurement management
resources, including capabilities for negotiating and for obtaining
in a fiscally responsible way the right products or services for a fair
price on behalf of the performing organization.

___________________

Evaluating the Market Conditions

(c

)U

___________________

Part of procurement management is to determining what sources


are available to provide the needed products or services for the
project. An evaluation of the marketplace is needed to determine
what products and services are available and from whom and on
what terms and conditions they are available.
While in most free market enterprise societies there are multiple
vendors offering comparable products, there may be times when
choices of vendors are limited. There are three specific terms that
you may encounter:
z

Sole Source: Only one qualified seller exists in the


marketplace.

Single Source: The performing organization prefers to


contract with a specific seller.

Oligopoly: There are very few sellers and the actions of one
seller will have a direct effect on the other sellers prices and
the overall market condition.

UNIT 21: Project Procurement Management

Fill in the blanks:


Procurement decisions are made early on in the
processes.

2.

A may define the work to be


accomplished within the project, but it generally does
not define the product description as a whole.

Notes
Activity
___________________
Assumptions
can also affect
procurement
decisions.
___________________
Elaborate.
___________________
___________________
___________________

PE

1.

253

Check Your Progress

Evaluating Assumptions, Constraints, and Other


Factors

)U

The project assumptions and constraints can have direct influence


on the procurement process. For example, a project with a time
constraint to complete a project by a given deadline may be forced
to procure additional labourers to complete portions of the project
work in order to complete the project as scheduled.

Figure 21.1: Project Assumptions and Constraints

(c

Assumptions can also affect procurement decisions. A false


assumption that the installation of a piece of equipment was part
of the quoted price could skew the projects budget. Assumptions,
especially in procurement planning, must be eliminated if at all
possible.

Figure 21.2: False Assumption

___________________
___________________
___________________
___________________
___________________

Project Management & Its Applications

Notes

Other factors must also


procurement planning:

be

considered

Cost estimates

___________________

Schedule estimates

Quality management requirements

Cash flow projections

WBS components

Risk management plans

Staff acquisitions and development

___________________
___________________
___________________
___________________
___________________

effective

Check Your Progress

___________________
___________________

have

PE

___________________

___________________

to

254

True or False:
1.
2.

The project assumptions and constraints can have


direct influence on the procurement process.
Assumptions can also affect procurement decisions.

(c

)U

Summary

Procurement Management involves getting work done by people


outside the project team. Project Procurement Management
includes administering contracts and change control process to
manage contracts or purchase orders. Projects routinely require
procurements. Project procurement involves a systematic process
of identifying and procuring, through purchase or acquisition,
necessary project services, goods, or results from outside vendors
who will carry out the work. Once the contract is complete, the
final step is to close the contract. The contract is audited to make
certain all terms of the contract were fulfilled. Project procurement
is not an exact science. Although this process is generally accepted
within the industry, actual execution may differ between
organizations. Procurement planning centres on four elements:
Whether or not procurement is needed, what to procure, How
much to procure and When to procure. The project assumptions
and constraints can have direct influence on the procurement
process.

Lesson End Activity


Find out the
management.

Modern

approaches

to

project

procurement

UNIT 21: Project Procurement Management

Keywords

255

Product Description: The product description defines the details


and requirements for acceptance of the project.

___________________
___________________
___________________
___________________
___________________

PE

Project Procurement: Project procurement involves a systematic


process of identifying and procuring, through purchase or
acquisition, necessary project services, goods, or results from
outside vendors who will carry out the work.

Notes

Procurement Planning: Procurement planning is the process of


identifying which part of the project should be procured from
resources outside of the organization.

___________________
___________________
___________________

Questions for Discussion


What is Project Procurement?

2.

Discuss the four elements of procurement planning centres.

3.

What is Sole, Single source and Oligopoly?

4.

The project assumptions and constraints can have direct


influence on the procurement process. Explain.

5.

What are the other factors must also be considered to have


effective procurement planning?

)U

1.

Further Readings
Books

Clements/Gido, Effective Project Management, Thomson.


Clifford F. Gray and Erik W. Larson, Project Management, Tata
McGraw Hill.
Dennis Lock, Project Management, Ninth Edition, Gower.

(c

K. Nagarajan, Project Management, Third Edition, New Age


International.
Prasanna Chandra, Projects-Planning, Selection, Financing,
Implementation and Review, Sixth Edition, Tata McGraw Hill.
P.C.K. Rao, Project Management and Control, Sultan Chand &
Sons.
Vasant Desai, Project Management, Second Revised Edition,
Himalaya Publishing House.

___________________
___________________

Project Management & Its Applications

___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________

http://www.euroi.ktu.lt/lt/images/stories/Paskaitos/ch12.pdf
http://www.eastidahopmi.org/5-16-07mtg.pdf
http://www.levlafayette.com/node/330

http://www.anthonyyeong.com/Anthony_PMBOK_Chapter_12.pdf

http://cmtsw.customs.gov.tw/Upload/c_webnews_c_webnews/652/10
10511_2%20%20Project%20Procurement%20Management.pdf

(c

)U

___________________

Web Readings

Notes

PE

256

UNIT 22: Evaluating Bids for Major Equipment

Unit 22

257

Evaluating Bids for Major


Equipment

Notes

___________________
___________________
___________________
___________________

After completion of this unit, the students will be aware of the following
topics:
Pre-select Vendors

Prepare Inquiry

Receive Bids

Preliminary Evaluation

Technical Evaluation

Commercial Evaluation

Pre-award Meetings

Conditioning of Bids

Vendor Selection

Pre-commitment Meeting

Awarding the Order

)U

Introduction

The analysis of the investment and return on a major piece of


equipment has the same ingredients as the analysis of a complete
process plant. It is only a matter of scale. In order to do this job
properly, an engineer must be able to do more than check the bid
technically. A combined technical and commercial evaluation must
be performed with many non-technical factors taken into
consideration.

(c

There are eleven phases to the major equipment bid evaluation


process. These are:
1.

Pre-select vendors

2.

Prepare enquiry

3.

Receive bids

4.

Make preliminary evaluation

5.

Make technical evaluation

___________________

PE

Objectives

___________________
___________________
___________________
___________________
___________________

Notes
Activity
___________________
Make
a list of probable
vendors for the selected major
___________________
equipment
of your project.
___________________
___________________
___________________
___________________
___________________
___________________
___________________

Make commercial evaluation

7.

Conduct pre-award meeting

8.

Condition bids

9.

Select vendors

10. Conduct pre-commitment meeting


11. Award order.

Let us consider these one by one.

Pre-select Vendors

Before inquiries are issued, potential bidders should be preselected from the ones who have the experience and who have
performed satisfactorily in the recent past. Before sending an
inquiry to a new vendor, pre-qualify him by asking for a
presentation of his qualifications, his prior and similar experience,
and a list of references. Take a feedback from the references,
especially those who have similar equipment installed from the
same vendor. Visit his manufacturing plant, look at his
organization especially with regard to quality assurance aspects,
meet some of the key people and test their calibre. Look at the
equipment and facilities and do a good evaluation of their overall
competence.

(c

)U

___________________

6.

PE

258

Project Management & Its Applications

Another point to look for is the current shop load. A manufacturer


that is too busy may cause late delivery. On the other hand, a
manufacturer whose workload is too little may be in difficulty. He
may go out of business before he can complete your order. Don't
select a vendor who is too hungry. The management may be
spending more time worrying about keeping the company solvent
than attending to your order.
Don't let anyone bid just because they ask. If the vendor is
persistent, let him give you a pre-qualification presentation. If he
does not meet your criteria, tell him why.
You may think it costs you nothing to let him bid if he wants to,
but it will waste your time to review bids which are not acceptable.
Don't ask a vendor to bid to just get an extra quote to keep
your favourite vendor competitive. Also, don't send an inquiry to a
vendor if you are not prepared to give him an order should his bid
be technically and commercially acceptable. Apart from wasting

UNIT 22: Evaluating Bids for Major Equipment

Notes
Activity
___________________
Prepare
an enquiry document
for the equipment selected by
you ___________________
for procurement.
___________________
___________________
___________________

PE

Finally, don't send out too many inquiries. Four to five bidders are
enough to get a competitive price. Six is normally the maximum
number of bidders to whom inquiries should be sent so as not to
use up too much of your time and also the time of a large number
of vendors.

259

your own time, it is unfair to ask a vendor to prepare a bid if you


have no intention of placing an order. Whenever you ask anyone to
bid, he must have a reasonable chance of getting an order.

Normally, organizations maintain a list of approved vendors for


each type of equipment and the inquiry is sent to these vendors
only. This list must be periodically reviewed and updated on the
basis of experience with particular vendors.

___________________
___________________
___________________
___________________

Check Your Progress


Fill in the blanks:

bidders are enough to get a competitive


price.

2.

Before inquiries are issued, potential bidders should be


pre-selected from the ones who have the
and who have .

)U

1.

Prepare Inquiry

(c

Provide the vendor with all the information he needs to make a


specific bid. Tell him exactly what you want. To help the vendor,
give him a set of documents, with an index, assembled in a logical
order. Make it easy for him to find the important requirements. It
does not help you or the vendor if critical points are hidden away
in some obscure part of the documentation. If the vendor fails to
allow for these in his quotation and you subsequently insist upon
them being supplied, it merely creates ill feeling and friction.
There may be claims for extras which could hurt the overall
quality of the job. In general, the inquiry document should be
divided into clear-cut sub-sections as follows:
z

Technical (1) Data sheets giving process requirements,


material of construction, mechanical and special design
features, quality and testing requirements, scope of supply
with regard to instruments/electrical and other ancillary
equipment, electrical and utility data, applicable design codes,
standards, etc. (2) Related specifications giving general design

___________________

Project Management & Its Applications

260

Documents (1) Number of drawings/documents required at


various stages, (2) Drawing/document approvals, (3) Quality of
drawings/datasheets, (4) Definition of drawing needs
(foundation, arrangement, cross-sectional and parts, terminal
connection details, etc.), (5) Number and contents of
operation/maintenance manuals, (6) Number and contents of
manufacturing record books (contents should include test
certificates of various stages of inspection, performance
data/curves, SPIL spare parts interchangeability list, etc.).

Commercial (1) Commercial terms, (2) Required delivery


date and location, (3) Expediting and progress reporting,
(4) Inspection requirements, (5) painting, finishing and packing,
(6) Invoicing and payment terms, (7) Names and addresses of
contacts, (8) Warrantees and guarantees, (9) Penalty clause
for late delivery/deficient performance, (10) Bid due date,
(11) Sealed bid instructions (if applicable), (12) Service
representatives at site and (13) Unit rates and extensions.

___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________

On major projects, it is desirable to use the sealed bid procedure.


Vendors are required to submit their proposals in sealed envelopes
provided by the inquirer. This ensures confidentiality until all bids
have been received. Bidders should be asked to separate the
technical and commercial portions of their bids so that these can be
processed independently. Commercial bids may be allowed to be
revised after evaluation of technical bids has been completed and
necessary clarifications/additions/deletions provided to the bidder.

(c

)U

___________________

PE

___________________

data and other requirements. (3) Sketch/drawing giving out


line details wherever required.

Notes

A common fault is to issue an inquiry with a complete volume of


the project job specifications appended. This leaves it up to the
vendor to find out for himself to what extent the specifications
apply to the equipment under consideration. You may think this
practice provides you with cover saves your time and puts the onus
on the bidder. But this is not the case. In due course, you will have
to review bidder's specifications and drawings to check that
requirements of the specifications have been met. You have much
better chance of getting a bid which meets the specification
requirements if you extract relevant parts of the specifications and
include these in the specific inquiry documents.
An inquiry should be as specific as possible to ensure that all
bidders respond on a common basis. But inquiry documents should

UNIT 22: Evaluating Bids for Major Equipment

A final point: Before the inquiries are issued, check with each
vendor to ensure that he is interested in receiving the inquiry and
will provide you with a bid by the due date. It can be frustrating to
issue inquiries and then receive decline to bid letters just prior to
the due date. This will mean lost time if a second round of
inquiries has to be initiated with new vendors.

Check Your Progress


Fill in the blanks:

To help the vendor, give him a set of documents, with


an , assembled in a logical order.

2.

On major projects, it is desirable to use the


procedure.

)U

1.

Receive Bids

As soon as the inquiries have been issued, phone the vendors to


check that they have received the bid documents. Midway through
the bidding period, make another call to check that the vendor is
working on the bid and intends to submit the bid by the required
date. Finally, a week prior to the bid due date; remind the vendor
that the bids are due on the date specified. This continued contact
during the bidding period is well worthwhile for major equipment.
It lets you know how active and responsive the individual vendors
are to your inquiry. And you get an early warning if a vendor is
going to decline to bid or be late with his submission.

(c

261

Notes
Activity
___________________
Write
a short note on bid
procedure.
___________________
___________________
___________________
___________________

PE

not be so restrictive that they exclude alternative proposals. The


inquiry document should instruct the bidder to provide his base bid
exactly in line with inquiry specifications. However, he should be
permitted to offer alternative designs which will meet the
requirements so long as deviations or alternatives to the base
specifications are clearly defined. In this way you allow the bidders
to show their initiative and to introduce new designs and concepts.
It also helps you to keep up to date with the market.

If the vendor is going to be late, he should advise you sometime


before the bid due date to request for an extension. You can then
check with the other vendors to find out whether they also need an
extension. If so, you might agree that an extension will be
worthwhile overall to get more complete and better quality bids. If,
however, one vendor alone asks for an extension or fails to ask for

___________________
___________________
___________________
___________________
___________________

Project Management & Its Applications

___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________

During the bidding period, all vendors should be given an equal


opportunity to bid and have access to any information available to
help them prepare their bids. Clarifications and answers to
questions raised by one bidder should be disseminated to the other
vendors.

If the sealed bid procedure is used, any bids received prior to the
bid closing date should be kept in sealed condition only until the
official opening on the bid due date. Vendors should submit their
bids in the envelopes provided and the envelopes should be
properly sealed according to the instructions. Sealed bids should be
opened in the presence of two or more nominated persons who will
witness that at the time of opening, the seals were intact. The
individuals attending the opening of sealed bids shall sign the
envelopes and the cover sheet of each bid to witness the fact that
the bids were sealed until the time noted. Any bids received after
the bid due date should be disqualified and returned to the vendor
unopened.

(c

)U

___________________

an extension and submits a bid late (whereas all other bidders


have met the bid due date) then his bid should be disqualified. The
fact that he cannot get his bid in on time shows he may be equally
late with his drawings and material deliveries.

Notes

PE

262

Where separate technical and commercial bids are required to be


submitted, this will allow a wider distribution of the technical
portion of the bids and a more restricted distribution of the
confidential commercial information. If the sealed bid procedure is
not used, it is still better to hold all bids in a secure place until the
bid due date and open them simultaneously. This ensures that
there is no early access to confidential pricing information, leading
to the possibility of unethical disclosure.

Check Your Progress

True or False:
1.

A week prior to the bid due date; remind the vendor


that the bids are due on the date specified.

2.

If the sealed bid procedure is used, any bids received


prior to the bid closing date should be kept in sealed
condition only until the official opening on the bid due
date.

UNIT 22: Evaluating Bids for Major Equipment

Preliminary Evaluation

263

PE

For the preliminary evaluation, prepare a checklist of the known


components required, the drawings, datasheets and the documents
that should have been provided and the key points in the
commercial terms. A simple check is entered against each item
under a column for each bidder. In case, the commercial bid has
also been opened, then at the bottom of preliminary evaluation,
enter the quoted cost plus any extras or adjustments, which might
apply for items omitted. Also note the promised delivery date for
the equipment and for the drawings.

Notes
Activity
___________________
1. Prepare
a checklist of
the known components
___________________
required, the drawings,
datasheets
and
the
___________________
documents
of
your
project.
___________________
2. Prepare a technical bid
evaluation sheet for the
___________________
equipment selected for
procurement.
___________________

Once the bids have been received and opened, simply check that
the bids are complete. Have the bidders responded fully? Do you
have all you need to make a proper evaluation?

)U

In the case of single bid procedure where technical and commercial


bid is common, it is worthwhile to list the bidders in ascending
order of quoted price and eliminate those whose bids are far
beyond the budgeted cost, for further evaluation. Time need not
be spent on bids where the price is obviously high, the bid is
incomplete, or the delivery and other aspects are unacceptable.
Another advantage of preliminary evaluation is that it brings to
light areas where required information is missing or bid data need
clarifications. In these cases vendors can be immediately contacted
for providing additional information needed.

Check Your Progress

Fill in the blanks:

For the preliminary evaluation, prepare a checklist of


the that should have been provided and
the key points in the commercial terms.

2.

Time need not be spent on bids where the price is


, the bid is incomplete, or the delivery and
other aspects are unacceptable.

(c

1.

Technical Evaluation

Once the bids have been initially checked out for completeness
or additional information received for making the bid complete,
perform a complete technical evaluation from the short list of the
most promising bids.

___________________
___________________
___________________
___________________

Project Management & Its Applications

___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________

A typical technical bid evaluation form provides a checklist of


general points to be considered during the technical evaluation. If
the inquiry documents have been assembled consistently and
logically, the same format may be used for bid tabulation form.
Once a basic check has been made that the equipment is
technically acceptable and meets the inquiry specification, then
look for additional benefits like efficiency, utility consumptions,
superior quality of materials, redundant/spare capacity, and other
design benefits that are specific to the bidder. Wherever possible,
make a cost estimate of these benefits to be considered during price
evaluation/negotiations.
Look for hidden additional costs or cost savings. A smaller, lighter
piece of equipment will require smaller foundations, smaller
structures and less permanently installed handling and
maintenance equipment. A well laid out modular piece of
equipment may require fewer piping connections and better access
for installation and maintenance. A simpler, more positive design
may require less external instrumentation and control for
operation.

(c

)U

___________________

Normally, it is necessary to make up a bid tabulation form for the


specific equipment using the past bid evaluation forms for similar
equipment from other projects. Time can be saved if this bid
evaluation form is prepared during the preparation of inquiry
document itself. This has double advantage (1) it ensures that all
information required for bid evaluation is included in the inquiry
document and (2) it allows you to proceed with the technical
evaluation immediately.

Notes

PE

264

Look also at the availability of vendor support. Has he got a local


representative and service facilities? What is the quality of
drawings and documents provided with the bid? When does he
promise final certified drawings? What warrantees and guarantees
does he provide?
Evaluate the operating cost over the required payout period.
Typical items to be considered for operating cost are:
z

Feedstock required and products produced.

Utilities, catalyst and chemicals consumed.

Spare parts cost and replacement periods.

Maintenance/service frequency and manpower.

Operating manpower levels.

UNIT 22: Evaluating Bids for Major Equipment

265
Notes
Activity
___________________
Prepare
a commercial bid
evaluation sheet for your
___________________
equipment.

To evaluate operating costs, establish a present day unit rate for


labour and utilities together with a compounded escalation index
for these unit rates for the future years to be evaluated. With these
factors, the expenditure for utilities, maintenance, etc. can be
determined in future years as illustrated in Figure 22.1.

___________________
___________________

PE

___________________
___________________
___________________
___________________
___________________

)U

___________________

Figure 22.1: Evaluating Operating Costs

Check Your Progress

True or False:

It is necessary to make up a bid tabulation form for the


specific equipment using the past bid evaluation forms
for similar equipment from other projects.

2.

A typical technical bid evaluation form provides a


checklist of general points to be considered during the
technical evaluation.

(c

1.

Commercial Evaluation
A preliminary commercial evaluation is performed when the bid is
received and opened. The main purpose is to establish a shortlist of

Project Management & Its Applications

___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________

The first thing to check is that everything required as per


specifications has been included in the quoted price. Some things
to look for are: drawings, documents, maintenance and operating
manuals, test facilities and test certificates, painting and
insulation, shop assembly, packing and crating, field service
representatives, freight to specified delivery point, and insurance
cover until ownership transfer. Then add any commercial loading
due to technical deficiencies pointed out in technical bid
evaluation.
Having checked the basic items, which could affect the cost,
examine the commercial terms. Is a down payment required with
intermediate progress payment? What warranties and guarantees
are offered? What delivery date is promised?

Check that unit rates or per diem rates have been quoted for
possible additions or extensions of service personnel. If the price is
not fixed, but subject to escalation, check that the escalation
formula clearly defines the material, labour or other components
and the national indices used.

(c

)U

___________________

bidders requiring serious consideration. The detailed commercial


evaluation should be performed after the technical evaluation is
completed.

Notes

PE

266

Once the basic prices have been checked, the next step is to apply
adjustments and corrections. Add allowances for differential
freight costs, import costs, currency exchange, agents or any other
additional services, which may be required.
Take into account the cost of money. The simplest method is to
adjust all costs to a present day value. Allow a discount equal to
the prevailing interest rates for money, which will be paid in
future. This will penalize vendors requiring a high down payment
and large interim progress payments and favour those vendors
who do not require payment until job completion. If you can defer
payment of money, you have the benefit of "float" interest the
money can earn while in your possession. Paradoxically, this
approach may realize a vendor offering a delivery date much
earlier than that is required. Too early a delivery date will cost
money. It may also invalidate warrantees if the equipment is not
put into service for some months after it has been received.
The best plan is to insist upon a delivery date that meets your
erection plan. The conversion of quoted cost to present day values

UNIT 22: Evaluating Bids for Major Equipment

267
Notes

applies to down payments, progress payments, final payments,


operating costs, field service costs and other costs. Figure 22.2
shows methods of converting future costs to present day costs.

___________________
___________________
___________________
___________________

PE

___________________
___________________
___________________
___________________
___________________

(c

)U

___________________

Figure 22.2: Converting Future Costs to Present Day Costs

Project Management & Its Applications

268

___________________
___________________
___________________

Fill in the blanks:


1.

A preliminary commercial evaluation is performed


when the bid is .

2.

Once the basic prices have been checked, the next step
is to apply .

Pre-award Meetings

Pre-award meetings should be held with short listed bidders prior


to selection. At the pre-award meetings, review any questions
which have arisen during the technical and commercial
evaluations. Give the bidder a final chance to confirm or clarify
points contained in his bid.
Prior to the meeting, prepare an agenda. List all questions and
points of concern. Request that the bidder come to the meeting
prepared to answer all points on the agenda. Following the
meeting, bidder may be given a short time to confirm in writing
any additions, changes and clarifications to his technical
specifications and any adjustments to his price. The pre-award
meeting should not allow vendors to modify their base bids
merely amplify and clarify bids already submitted.

(c

)U

___________________

2. ___________________
Find out intangible and
other factors which might
influence vendor selection
___________________
of your project.
___________________

Check Your Progress

PE

Notes
Activity
1. ___________________
Review any questions
which have arisen during
___________________
the
technical
and
commercial evaluations of
___________________
your project.

Check Your Progress

Fill in the blanks:


1.

Pre-award
meetings
should
be
held
bidders prior to selection.

2.

Prior to the meeting, prepare an .

with

Conditioning of Bids
After the complete technical and commercial review, the next step
is to "condition" the bids. The conditioning process allows you to
take into account intangible and other factors which might
influence vendor selection. A low bid may not necessarily be the
cheapest bid. One vendor may require more engineering follow-up,
other may require more extensive expediting and inspection.
Consider these points when conditioning bids: additional
engineering review required, late receipt of engineering drawings,

UNIT 22: Evaluating Bids for Major Equipment

Check Your Progress


Fill in the blanks:

2.

Notes
Activity
___________________
1. Prepare
a
vendor
selection process for your
___________________
project.
2. Find
out the agenda for
___________________
the
pre-commitment
meeting of your project.
___________________
___________________

PE

1.

269

additional expediting/inspection required, learning curve for new


vendor, retraining of operators for new equipment model,
interchangeability of spare parts with existing equipment, support
local/national vendors, future service availability, and ease of
maintenance and suitability of incorporation into plant layout.

After the complete technical and commercial review,


the next step is to .
A bid may not necessarily be the cheapest
bid.

___________________
___________________
___________________
___________________
___________________

Vendor Selection

)U

Having completed all the above steps, the vendor can now be
selected. Normally, this is not done by one person alone. The
technical and commercial evaluation will be signed off by the
technical management, commercial management and possibly the
client. If the case has been prepared properly, support and
approval may be a matter of circulating the forms for signature. In
some cases, it may be necessary to call a meeting and make a walkthrough presentation of the pros and cons of the bidders and justify
the basis for recommendation.

Check Your Progress

Fill in the blanks:

The technical and commercial evaluation will be signed


off by the .

2.

In some cases, it may be necessary to call a meeting


and make a of the bidders and justify
the basis for recommendation.

(c

1.

Pre-commitment Meeting
Once agreement and approval have been reached about the vendor,
call the vendor in for a pre-commitment meeting. This meeting is
to let him know that he is close to getting an order. But before you
actually place the order, be sure that all points are fully
understood and confirmed.

Project Management & Its Applications

___________________
___________________
___________________
___________________
___________________
___________________

The agenda for the pre-commitment meeting would be to


thoroughly review the inquiry document and specifications, all the
points arising from the pre-award meeting and any subsequent
correspondence and, in general, to be sure that the vendor has a
complete understanding of the requirements and that there are no
ambiguities in the scope of supply or his pricing arrangements. If
the pre-commitment meeting is complete with no outstanding
points, then the vendor may be verbally advised that he has
received the order. If, however, as a result of the pre-commitment
meeting there are still some points to be clarified or confirmed by
the vendor, then the vendor should be required to put these in
writing before he officially receives the order.

Notes
Activity
___________________
Prepare
a list of documents
to be issued with purchase
___________________
order.

___________________
___________________

PE

270

Check Your Progress

True or False:
1.

If the pre-commitment meeting is complete with no


outstanding points, then the vendor may be verbally
advised that he has received the order.

(c

)U

2.

Once agreement and approval have been reached about


the vendor, call the vendor in for a pre-commitment
meeting.

Awarding the Order


The last step is to formally issue the order. A fax or letter of
commitment may be adequate initially. But this should be followed
up, as quickly as possible, with a formal purchase order. Attach all
the updated specifications, data sheets and documents originally
included in the inquiry documents with the agreed amendments
marked therein.
Do not allow too much time to elapse between the fax or letter of
intent and the formal purchase order. In the final analysis, the
formal purchase order is the contract document, binding on the
vendor.

Check Your Progress


Fill in the blanks:
1.

The last step is to formally .

2.

In the final analysis, the formal purchase order is the


.

UNIT 22: Evaluating Bids for Major Equipment

Summary

271
Notes

This unit lists out and explains various steps involved in the
procurement of major equipment. Each stage of procurement
starting from vendor pre-selection to issue of enquiry, bid
evaluation, vendor selection and placement of order has been
described with special emphasis on various important points to be
considered at each stage.

___________________
___________________
___________________
___________________

Lesson End Activity

PE

___________________

Select a major equipment of your project and list out complete


documentation required for its procurement. Specific attributes of
each document should also be given.

Keywords

Bid Price: A bid price is the highest price that a buyer (i.e. bidder)
is willing to pay for a good. It is usually referred to simply as the
"bid."

)U

Technical Evaluation: Tests or studies conducted to investigate


and determine the technical suitability of an equipment, material,
product, process, or system for the intended objectives.
Vendor Selection: The process by which an organization
evaluates and decides with which suppliers they will conduct
business.
Vendor: A vendor is any person or company that sells goods or
services to someone else in the economic production chain.

Questions for Discussion

Why vendor evaluation and registration is important?

2.

Describe steps involved in finalizing ordering of major plant


equipments.

(c

1.

3.

Why techno-commercial evaluation is necessary for major


equipments and systems?

4.

Describe steps involved for placing order after bid evaluation.

5.

Your organization wants to have a list of approved vendors for


each major equipment. List out the general criteria required
for enlisting a vendor.

___________________
___________________
___________________
___________________
___________________

Project Management & Its Applications

Notes
___________________
___________________
___________________

6.

Make a check list of the points to be included in the purchase


order so as to avoid disputes/additional costs during the
engineering, manufacture and delivery of the equipment.

Further Readings

272

Books

___________________

Clements/Gido, Effective Project Management, Thomson.

___________________
___________________

PE

___________________

Clifford F. Gray and Erik W. Larson, Project Management, Tata


McGraw Hill.

___________________

Dennis Lock, Project Management, Ninth Edition, Gower.

___________________

K. Nagarajan, Project Management, Third Edition, New Age


International.

___________________

Prasanna Chandra, Projects-Planning, Selection, Financing,


Implementation and Review, Sixth Edition, Tata McGraw Hill.
P.C.K. Rao, Project Management and Control, Sultan Chand &
Sons.

(c

)U

Vasant Desai, Project Management, Second Revised Edition,


Himalaya Publishing House.

Web Readings

http://www.maxwideman.com/papers/procurement/procurement.pdf
http://www.wisegeek.com/what-is-project-procurement.htm#didyou-know
http://www.forthconstruction.co.uk/downloads/achievingexcellence-guide-3.pdf
http://www.infrastructureaustralia.gov.au/publications/files/Procur
ement_Benchmarking_Volume_1_final.pdf

UNIT 23: Attributes of a Good Project Manager

Unit 23

273

Attributes of a Good Project


Manager

Notes
Activity
___________________
Write
short note on Creative
Endeavour of your project.
___________________
___________________
___________________
___________________

PE

Objectives

After completion of this unit, the students will be aware of the following
topics:

___________________
___________________

Creative Endeavour

Authority and Responsibility

Right to Lead and Style of Management

___________________

Discreet Use of Power and Experience Requirement

___________________

Planning, Scheduling and Decision Making

Knowing the People

Introduction

)U

Successful project management requires more than charts,


procedures and methods. The appropriate authority, responsibility,
style and training and experience for the project manager are
equally vital. Project management will not reach its full potential
unless hard thought is given to the position and how the person
filling it relates to the project team.

Creative Endeavour

A "project", as we now use the term, is a one-time unique


endeavour by people to do something that has not been done the
same way before. A 'successful' project is finished within a time
and for a cost that makes it economical or profitable and serves its
intended function.

(c

Because of its uniqueness, a project can turn sour by being finished


late or over budget, or by not performing the desired service.
Unexpected problems will usually arise to jeopardize success,
unless the management is structured and prepared to cope with
such problems.
It is possible to complete a project using the traditional vertical
pyramidal organization. But success is more likely by adopting the
project team and project management' concept. In this concept,

___________________

Project Management & Its Applications

Notes
___________________
___________________

a separate team is formed of personnel from the various functional


groups. A project manager is the leader. However, success isn't
assured unless there is also a good understanding of why a project
manager is needed and what he is to accomplish.

274

Why a Manager?

___________________

___________________

The need for project management arises from the difficulty the
"boss" of the pyramidal organization has in expeditiously handling
the extra problems of the project in addition to his other
responsibilities. What is needed is an extension of this "boss"-the
manager who has the responsibility for the project and the longterm traditional organization. By having a project manager fill this
role, the objectives are:

___________________

Centralize in one person, who has no other duties, all the


responsibility of the project.

Have realistic goals set for the project (for all participating
groups), considering the resources that each can bring to bear.

Have decisions made on the project quickly enough to meet its


needs, and benefiting the project as a whole not just a
portion.

___________________
___________________
___________________

(c

)U

___________________

PE

___________________

Provide a means of anticipating the problems during the


course of the project.

Give one person the responsibility of quickly developing


solutions to the problems, so that the project will stay on
target for cost, schedule and serviceability.

Success in accomplishing these objectives will depend upon the


type of person selected as the project manager and how his position
is set up. Thus, we need to consider his authority, responsibility
and accountability, reporting relationship, the style of project
management and the type of training required for him.

Check Your Progress

Fill in the blanks:


1.

A 'successful' project is finished within a


and for a that makes it economical or
profitable.

2.

It is possible to complete a project using the


organization.

UNIT 23: Attributes of a Good Project Manager

Authority and Responsibility

275

A project manager should have the 'same' authority as the "boss"


for his project and only his project. He and his boss should 'share'
the responsibility for the project. To do this, the project manager
must report to the "boss". Any other solution makes the project
manager a mere coordinator. As such, he can't achieve the
objectives previously stated.

Check Your Progress

)U

True or False:
1.

Project manager will have no authority in the


permanent organization structure.

2.

A project manager should have the 'same' authority as


the "boss" for his project and only his project.

The Right to Lead and Style of Management


A project manager to achieve a successful project must have a
"stick" to induce progress. This is true because the needs of the
project can appear to threaten the security and prestige of the
permanent functional organization. Unless the project manager
has a proper lever to properly assign personnel and motivate them
to meet needs (give priority to the project work), an effective team
may never be realized. The project will never be successful.

(c

Notes
Activity
___________________
1. Find
out the difference
between Authority and
___________________
Responsibility.
2. What
is the Style of
___________________
Management
of
your
project?
___________________
___________________

PE

Perhaps the hardest problem is to decide on what authority a


project manager will have. Unless a separate organization is set up
for a project, with no connection whatever to the original, the
heads of the functional departments must retain authority over
their departments. This means managers of sales, engineering,
procurement, construction, estimating, manufacturing and
accounting will still report to the "boss" at the top of the pyramidal
structure. So the project manager will have no authority in the
permanent organization structure.

A project manager can create this lever by 'his own personality'. Or


it can be created by written directives from the "boss". In effect,
this lever must be the same authority held by the man at the top of
the pyramid. The project manager, thus, is an extension of the
management itself.

___________________
___________________
___________________
___________________
___________________

Project Management & Its Applications

___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________

By the same token, the responsibility of the project manager


must be a share of that held by the "boss". If a project goes sour,
the "boss" is accountable. The project manager must share this.

Notes
Activity
___________________
Selecting
a project manager
is like selecting managers in
___________________
general.
Explain.

Leadership Factor

Think in terms of what the project manager contributes. If the


project will proceed as well without him, he is contributing
nothing. Merely observing and reporting events to his superior
throws the job of managing the project back to his superior.
Furthermore, he makes little contribution if he does not anticipate
problems and take action to head them off. This is particularly true
if the project manager only criticizes the group perceived to be at
fault when things go wrong. The other groups in the project team
will do this anyway. They need no help from the project manager.

PE

276

A project manager should be an aggressive leader. He should really


be a manager. He should set realistic objectives for the team
planning, scheduling, arranging for staffing, motivating, directing
and measuring results.

(c

)U

Style of Management

If the project manager reports to the "boss", sharing his authority


and responsibility, then the style with which the project is
managed must reflect the influence of both the personalities
involved. There is no single type of personal approach to managing
a project which is successful. On the contrary, considerable
variation is tolerable.
Should the project manager take a very forceful lead, or simply
observe and report results? He will probably aggressively manage
in some area, coordinate in others, and in some situations only
observe.

Check Your Progress

Fill in the blanks:


1.

If a project goes sour, the is accountable.

2.

A project manager should be an leader.

Discreet Use of Power and Experience Requirement


He must control, but not in a way that stifles the creativity of other
team members. Innovation should be encouraged because of the

UNIT 23: Attributes of a Good Project Manager

Notes
Activity
___________________
Discuss
the Planning and
Scheduling of your project.
___________________
___________________
___________________
___________________

PE

In thinking about style, the project manager should review the


project status and evaluate his own contribution. Is the project
proceeding better because of his contribution? Or would it be going
well without him? Is his objective setting, planning, scheduling
and motivating saving money? Is it saving time and improving
serviceability? Or is it the reverse?

277

project's uniqueness. But the project team members need a leader


if a team effort is to result, and the project is to be on time, on
budget and satisfactorily completed.

___________________

If the project manager cannot say that he is making a meaningful


contribution, he should change style.

___________________

Experience Requirement

___________________

Suppose the project manager does report to the officer or manager


having overall responsibility for the project. He does share this
authority and responsibility. He uses a style of aggressive
leadership. Given these points, what then should be his
background?

)U

In projects that involve sales, engineering, estimating,


procurement, construction and accounting, the project manager
cannot be an expert in all these. Perhaps by a rotation of
assignments he can have some experience in all of these. But this
does not necessarily create expertise.

Selecting a project manager is like selecting managers in general.


But there is a difference. A project manager deals with a task that
has a specific start and end. It has a scope that is or will be well
defined.

Check Your Progress

True or False:

If the project manager cannot say that he is making a


meaningful contribution, he should change style.

(c

1.
2.

Selecting a project manager is like selecting managers


in general.

Planning, Scheduling and Decision Making


The decisions to be made by a project manager generally relate to
"what" and "when" tasks are to be done. The decisions on "how"

___________________

___________________

Project Management & Its Applications

___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________

tasks are to be done are usually made by the project team group
heads. These decisions are probably based on policies and
procedures established by their permanent functional department
heads. Thus, the problem of deciding what background a project
manager needs is simpler than for a functional manager.

Notes

On the other hand, a good project manager must possess a


multitude of diverse skills and good judgment in many areas. He
must be able to set goals, plan, schedule, organize, motivate and
measure results.

PE

278

More than this, he must be people oriented. He must be dedicated


to helping others to do their work in a manner that contributes to
the satisfactory completion of the project. In addition, there is one
more necessary characteristic. It isn't as widely recognized or
understood. This has to do with exercising control over the
decisions made by the group in the project team so that these
decisions aid and do not detract from achieving overall project
objectives.

Decision Making

(c

)U

Successful project management requires an understanding of the


decision making process used by functional groups working on the
project. Particularly, the decisions that can be made by one group
that significantly affect what other groups must do.
A good project manager minimizes decisions made unilaterally by
one group of the team without careful consideration of the effects
on over-all project costs, schedules and quality.
Examples of such unilateral decisions are many. For instance,
engineering may specify a material that is only marginally better
than another for the service conditions, but which will require
longer delivery and will upset the sequence of planned construction
operations. The same results can be caused by procurement
selecting a vendor's price that is lower, but for which a longer
delivery time will probably result.
On the other hand, construction could decide to try to finish the job
sooner, to save on overhead type costs, without considering the
extra costs that will be required for overtime in engineering or
premium freight costs for expedited deliveries.
In the final analysis, the important objectives are the overall cost
and time requirements of the project. Savings in one sector are

UNIT 23: Attributes of a Good Project Manager

Check Your Progress


Fill in the blanks:
The decisions on "how" tasks are to be done are usually
made by the project .

2.

Successful
project
management
requires
an
understanding of the process used by
functional groups working on the project.

Notes
Activity
___________________
Write
short note on knowing
the people. How these help
your___________________
project?
___________________
___________________
___________________

PE

1.

279

only meaningful if larger expenditures are not required in other


sectors.

___________________
___________________
___________________

Knowing the People

)U

The best equipped person for the position of project manager is one
who knows and understands the working of the project-team group
that will make the most decisions affecting other groups and overall project objectives. Usually, most of such decisions are made by
engineering. Once the work of engineering is finished, the
problems of other groups on the project are "cast in concrete". They
cannot be changed.

The easiest way to gain this knowledge and understanding is by


doing engineering design work. This isn't the only way. A person
experienced in other fields who is perceptive, objective and
thoughtful can, by observation and inquiry, develop a good and
perhaps better understanding of the impact of engineering
decisions on the work done by other groups.
In any case, the good project manager cannot have a distorted view
of the importance of work done by one particular group. Like a
sports team, each group on the project team needs understanding
and guidance. Only then can the efforts of all members contribute
to satisfactory completion of the project.

(c

Check Your Progress

Fill in the blanks:


1.

Once the work of engineering is finished, the problems


of other groups on the project are .

2.

In any case, the good project manager cannot have a


distorted view of the done by one
particular group.

___________________
___________________

Project Management & Its Applications

___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________

Summary

Notes

This unit lists out and explains the important attributes of a good
project manager. Importance of qualities like managerial skills,
leadership, creativity, decision making etc. has been explained.
The need for a project manager and the authority he should have
in order to fulfil his responsibility has also been explained.

PE

280

Lesson End Activity

Draw an organization chart showing the position of project


manager vis a vis other discipline managers.

Keywords

Authority: The right to act in a specified way, delegated from one


person or organization to another.
Leadership: Leadership has been described as a process of social
influence in which one person can enlist the aid and support of
others in the accomplishment of a common task".

(c

)U

Manager: A Manager is the person responsible for planning and


directing the work of a group of individuals, monitoring their work,
and taking corrective action when necessary.
Responsibility: A duty or obligation to satisfactorily perform or
complete a task that one must fulfil, and which has a consequent
penalty for failure.

Questions for Discussion


1.

State the qualities required to become a successful project


manager.

2.

What is the basic knowledge and experience required for a


project manager of large project?

3.

In your opinion what more qualities a project manager should


have in order to be successful in the management of a project?

4.

List out additional help that should be provided to a project


manager of a petroleum project to make him effective.

UNIT 23: Attributes of a Good Project Manager

Further Readings

281

Books

Notes

___________________

Clements/Gido, Effective Project Management, Thomson.


Clifford F. Gray and Erik W. Larson, Project Management, Tata
McGraw Hill.

___________________
___________________
___________________

PE

Dennis Lock, Project Management, Ninth Edition, Gower.

___________________

K. Nagarajan, Project Management, Third Edition, New Age


International.

___________________
___________________

Prasanna Chandra, Projects-Planning, Selection, Financing,


Implementation and Review, Sixth Edition, Tata McGraw Hill.

___________________

P.C.K. Rao, Project Management and Control, Sultan Chand &


Sons.

___________________

Vasant Desai, Project Management, Second Revised Edition,


Himalaya Publishing House.

Web Readings

)U

http://www.syntelinc.com/Internal.aspx?id=707

http://99u.com/articles/6946/top-10-characteristics-of-great-projectmanagers
http://www.recruiter.com/i/attributes-of-a-good-project-manager/

(c

http://www.cio.com/article/447182/Six_Attributes_of_Successful_Pr
oject_Managers

___________________

Project Management & Its Applications

282

Notes
___________________
___________________
___________________

___________________
___________________
___________________
___________________
___________________

(c

)U

___________________

PE

___________________

UNIT 24: Modern Trends

Unit 24

283

Modern Trends

___________________
___________________
___________________

Objectives

Project Management Software

Project Software Evaluation

Project Engineering

Project Construction

___________________
___________________

PE

After completion of this unit, the students will be aware of the following
topics:
\

Notes

___________________
___________________
___________________
___________________

Introduction

)U

Project Management is a relatively young and emerging profession.


It started its development from the fore runners 'Operations
Research and Operations Management' in the seventies.
Automated software was also developed for use in project
management. Focus of research during this period was PERT
(Project Evaluation and Review Techniques), cost and schedule
control, performance measurement, use of WBS (Work Breakdown
Structure) and life cycle management. The concept of design to cost
and life cycle costing appeared during this period. In 1982, IEEE
organized a short course on project management through video
conference. The course book given to the participants of the course
was quite exhaustive. PERT and CPM (Critical Path Method) were
the main tools used in project management and software were
based on the use of these techniques. Thrust areas of research
during this period were:
Project risk management

Cost/schedule control systems

Team building and quality management

(c

During the nineties, research was focused on human resource


development, including team building, leadership development and
motivation. With the advent of personal computers (PCs), a
number of PC based software were developed and widely used in
project management. This proved to be a good take-off platform for
project management.

___________________

Project Management & Its Applications

___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________

Project Management Software

Notes
Activity
___________________
Provide
a brief history of
project management.
___________________

More than 200 project management software is available in the


market. While some software are function specific (e.g. Time Sheet
management) most of the software are general purpose and quite
flexible. Some software are business/function specific (e.g. some
software are best suited for maintenance projects, some are
specifically made for IT projects) and have limited applicability,
but most of the software are general purpose and can be used
across a full spectrum of industries/functions. Also, most of the
software use CPM (Critical Path Method) for preparing the
schedule. Some software use "critical chain" method for schedule
analysis, etc. (Scitor uses both critical path as well as critical chain
methods).

PE

284

PM Software Categories

Project Management software can be divided into two categories:


PM Software: These are software specially designed for PM
function. Most common software in this category are
Primavera, Micro Soft Project, Artemis, Milestones, etc.
Prince, Scitor, etc.

(c

)U

Level-1 Software: Designed for single project planning.


These are simple, easy to use and understand but with
limited data analysis capabilities, e.g. Milestone. Such
software is very useful for preparing summary schedules,
e.g. single page proposal schedule.

Level-2 Software: Designed for single project management


and aid project leaders in planning, tracking and
reporting. They provide comprehensive analysis of project,
progress reports and plan revisions. MS Project may fall in
this category.

Level-3 Software: These software feature multi-project


planning, monitoring and control by utilizing a common
database and sophisticated cross-project monitoring and
reporting software, e.g. Primavera.

ERP (Enterprise Resource Planning) Software: These are


the software which cater to all functions of business process
(e.g. finance, HRM, supply chain, etc.) and which have project
management function as modules, e.g. SAP R/3, BAAN,
Peoplesoft & JD Edward, etc.

UNIT 24: Modern Trends

Features of PM Software

Following features are generally offered by most of the Level-II


and III software.

Planning, Tracking and Monitoring: These most common


features provides planning and tracking of projects' tasks,
resources and cost.

Reports: Different reports in the form of Gantt chart (bar


chart), precedence network diagrams, tabular summaries and
business graphics are provided.

)U

Some of the very common reports are:

Gantt chart report showing plan v/s actual

Earned value analysis reports

Critical path analysis reports

Cost and schedule performance indices

Cash flow reports

What-if analysis

Multi-project analysis

(c

Developments in PM Software
During the past few years, all PM software has been improving
using internet technology. Most of the software is web enabled
now-a-days and offer internet based facilities such as:
z

285

Notes

___________________
___________________
___________________
___________________
___________________

PE

As an example, most of the Indian oil companies (including RIL)


have implemented/are implementing SAP for other business
function (e.g. Finance, Supply Chain, Operations, etc.) but not for
project management (PM). For PM function P3 etc. is used. Most of
the ERP software provides open architecture and PM software can
be seamlessly integrated with ERP software. ERP software's
project management modules capabilities are limited. Therefore it
is very common to use PM software (e.g. P3) and to integrate it
with ERP software, e.g. SAP R/3. Also while ERP software focuses
on most common business (mainly production phase) functions e.g.
finance, inventory control, etc. PM software focuses on PM
functions only. As a result now-a-days most of the ERP and PM
software have collaborated for providing integrated solutions.

e-mailing of data, schedules and reports

___________________
___________________
___________________
___________________
___________________

Project Management & Its Applications

___________________

data (schedules, reports, etc.) publishing on Internet/Intranet;

data capturing using Internet/Intranet, thus having multilocation capabilities.

There are some other salient points about PM software:


z

most of the software allows data exchange, e.g. MS Project


data can be imported and used in P3 and vice versa;

most of the time PM software data can be exchanged with MS


Office products, e.g. MS Excel and MS Access.

all software allows customization (only degree varies) to suit


organization specific needs/systems.

___________________
___________________
___________________
___________________
___________________
___________________
___________________

Notes
Activity
___________________
Evaluate
the various software
available for the management
___________________
of your
project.

PE

286

General Data Requirements

PM software data input requirements depend on the capabilities


and features of the software as software having resource planning
capabilities requires resource data to be input.
In general, following data is required as input by PM software:
z

Scheduling data, i.e. activity definition, activity duration


estimate and relationship with other activities.
Cost/budget data, i.e. activity wise or group of activity wise
budgeted cost and actual cost.

Resources data, i.e. activity wise or group of activity wise


budgeted resources and actual resource consumed etc.

(c

)U
z

Some software requires other data too, e.g. three time estimates,
etc. for simulating a schedule, WBS (work breakdown structure) in
order to organize data as per WBS.

Check Your Progress

Fill in the blanks:


1.

are software specially designed for PM


function.

2.

are the software which cater to all


functions of business process and which have project
management function as modules.

Project Software Evaluation


Generally only few companies may be buying PM software after
proper evaluation. Still it is interesting that more than 50 factors

UNIT 24: Modern Trends

287
Notes

may be used for software evaluation as used by National Software


Testing Laboratories of Conshohocken, Pennsylvania. Some
commonly used software are discussed below.

___________________
___________________

Primavera Project Planner (P3)

___________________
___________________
___________________

PE

This is the most commonly used PM software. P3 is one of the


products of PM family products offered by Primavera Inc. Till 5-6
years ago P3 was the most flexible and feature packed software at
affordable prices. Other software which has been in the market for
long is Artemis but it is very costly and unlike P3 requires highly
trained personnel for customization. Through cost competitiveness
and aggressive marketing, particularly in Asia, P3 became the defacto planning tool. Now MS project also has improved a lot and
can compete with P3.
P3 offers schedule preparation, costing/budgeting control, resource
planning, what-if analysis capabilities, variance analysis, reporting
and simulation (different software is needed) etc. But it is ironical
that most of the companies use only scheduling capabilities,
resource and cost modules is mostly not used fully.

)U

P3 is not so user friendly (as compared to MS Project) and it


requires good amount of training to be able to use all the features
of P3. This software is available from KLG Systel in India.

MS Project

MS Project has been improving its spread and quality along with
other Microsoft family products. Initially its capabilities were
mainly limited to preparation of bar-charts, PERT networks.

(c

The current version (MS Project 2000) has everything in it, i.e.
schedule, cost and resource planning/control capabilities. Also it
has web-enabled capabilities. MS Project is a MS Office product
and it is very easily available. It is very cheap as compared to P3
and Artemis, etc. It is extremely user friendly. Most of its
icons/commands are in line with other MS Office products.

Milestone

This is very easy to use software and very useful in preparing


level-1 schedules.
This software is very simple to use and offers all the features
required to prepare a schedule in the form of Gantt Chart.

___________________
___________________
___________________
___________________
___________________

Project Management & Its Applications

288

___________________
___________________
___________________
___________________
___________________
___________________
___________________

Fill in the blanks:

___________________

Check Your Progress

1.

is the most commonly used PM software.

2.

is very easy to use software and very


useful in preparing level-1 schedules.

PE

Notes
Activity
___________________
What
is the computer software
used
in
engineering,
___________________
procurement
of a project?

Project Engineering

During the last 10-12 years, engineering procedures have


undergone a lot of improvement. From the conventional drawing
boards, drafting has moved to PCs which has revolutionized the
production of drawings required for construction/procurement.
Following are the software commonly in use for engineering.

MicroStation/AutoCAD

(c

)U

AutoCAD is the most widely used software for drafting. Latest


version of AutoCAD (ver. 14.0) offers many facilities for drafting of
engineering drawings. MicroStation, however, have more database
thus allowing greater ease and flexibility.

PDS (Plant Design System)


This system allows construction of 3-D model and is very useful in
piping/cable routing as it allows immediate review with regard to
fouling/clashes of piping with equipment/foundation/structures/
maintenance space, thereby obviating the need for last minute
changes in piping routing so as to avoid these problems during
construction. Piping isometrics along with Bill of Quantities (BOQ)
can be directly extracted though the use of this program. Further,
this program allows visual 3-D view of the plant/equipment thus
aiding the erection planning and execution. By using SETROUTE
along with PDS, cable routing and cable BOQs can be easily
obtained thus simplifying the procurement of bulk materials.

Procurement Tracking System (PTS)


This software is ideal for keeping complete track of equipment and
bulk material procurement. All activities associated with
procurement, starting from the raising of PRs (Procurement
Requisitions) to the delivery of equipment to site are controlled
through this system. This system can be developed in-house (using

UNIT 24: Modern Trends

Engineering Documentation
Engineering documentation these days is mainly kept in the
electronic (soft) form because:
It is mainly generated in electronic form by use of
AutoCAD/MicroStation software.

Notes
Activity
___________________
Discuss
the
computer
software used in construction
of a___________________
project.
___________________
___________________
___________________

PE

289

Microsoft Access) or purchased from engineering consultancy


organizations like Bechtel.

It occupies very little space, is easy to store and retrieve.

___________________

It can be made available to virtually unlimited number of


persons through electronic media (Internet/Intranet).

___________________

Review and approval of documents can be organized online


thus reducing engineering time.

___________________

Engineering Documentation Centre is generally assigned the


responsibility of storage/retrieval/issue of engineering documents.
Various in-house developed software or custom-built software is
used for this purpose.

)U

Check Your Progress

Fill in the blanks:


1.

is the most widely used software for


drafting.

2.

system allows construction of 3-D model.

Project Construction

For scheduling, progress monitoring and resource allocation of


construction jobs, PM software like Primavera/MS Project are used
which provide the necessary Gantt (Bar) charts along with 'S' and
Bell curves for review and analysis.

(c

Design Review Stations which give a 3-D model of the


plant/equipment under construction have proved to be useful
assets in conceptualization and planning of erection activities.
These stations are nothing but TV monitors which show the plant
model through the use of PDS software. This is a very useful and
versatile tool offering a 'walk through' of the plant which is yet to
be constructed. Views from different angles provide the
construction engineer with complete visualization of the erected

___________________

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Project Management & Its Applications

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equipment/structures/piping thus making the task of erection


planning and deployment of construction equipment quite simple.

Notes

Establishment of a structural steel fabrication shop with automatic


structure fabrication machines may prove to be quite useful for
construction of large chemical/petrochemical/refinery projects. This
shop along with a pipe fabrication shop, in which pipes are bent to
the field requirements thus obviating the need for standard bend
and additional welding, can considerably reduce the construction
period.

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___________________

PE

290

Check Your Progress

True or False:
1.
2.

Design review stations have proved to be useful assets


in conceptualization and planning of erection activities.
Views from different angles provide the construction
engineer with complete visualization of the erected
equipment/structures/piping.

(c

)U

Summary

In this unit a brief history of project management evolution and


modern trends in project management are described in this unit.
Various PC based software used in project management have listed
along with their merit and capabilities. Other software that can be
effectively used in the management of engineering, procurement
and documentation have also been listed.

Lesson End Activity


In addition to computer software what are the other areas in
project management that need further development?

Keywords

ERP (Enterprise Resource Planning) Software: These are the


software which cater to all functions of business process and which
have project management function as modules.
Milestone: This is very easy to use software and very useful in
preparing level-1 schedules.

UNIT 24: Modern Trends

PM Software: These are software specially designed for PM


function.

Notes

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PE

Primavera Project Planner (P3): P3 is one of the products of


PM family products offered by Primavera Inc.

291

PDS (Plant Design System): This system allows construction of


3-D model and is very useful in piping/cable routing as it allows
immediate review with regard to fouling/clashes of piping.

Project Management Software: Project Management Software


are software programs that help with applying knowledge, skills,
tools and techniques to plan and control resources, costs and
schedules to meet the requirements of the particular project and
include such integrated functions as calendars, charts, tracking of
people and budgets, generating of reports and scheduling.

___________________
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___________________
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___________________

Questions for Discussion

Describe evaluation of project management systems.

2.

What are the major software available for project monitoring


and control?

3.

How to select software most suited for your project?

4.

Describe a PM software that you are familiar with. How much


effective it was as per your experience?

)U

1.

Further Readings
Books

Clements/Gido, Effective Project Management, Thomson.


Clifford F. Gray and Erik W. Larson, Project Management, Tata
McGraw Hill.
Dennis Lock, Project Management, Ninth Edition, Gower.

(c

K. Nagarajan, Project Management, Third Edition, New Age


International.

Prasanna Chandra, Projects-Planning, Selection, Financing,


Implementation and Review, Sixth Edition, Tata McGraw Hill.
P.C.K. Rao, Project Management and Control, Sultan Chand &
Sons.

Project Management & Its Applications

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Web Readings

http://www.bestpricecomputers.co.uk/glossary/projectmanagement-software.htm
http://bmoj.com/ppeg_lite.pdf

http://1000projects.org/project/civil-engineering-projects-forstudents-pdf/
http://www.stanford.edu/class/cee320/CEE320C/RobertFoxPresent
ation.pdf

(c

)U

___________________

Vasant Desai, Project Management, Second Revised Edition,


Himalaya Publishing House.

Notes

PE

292

UNIT 25: Case Study

Unit 25

293

Case Study

Notes

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___________________

Objectives

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PE

After analyzing this case, the student will have an appreciation of the
concept of topics studied in this Block.

Case Study: Corporate Social Responsibility (CSR) and Project


Management
Corporate Social Responsibility (CSR) has gained significant
momentum in recent years. The push is on to identify projects
that reflect the corporation's sense of social responsibility and to
tailor projects to reflect that sense. This is perhaps a step in the
right direction when it comes to the corporation's position in the
host community, but is extremely difficult and complex in its
implementation. There are two key factors that contribute to its
difficulty:

)U

Corporations' main goal is still profits; they owe this to their


shareholders. Although profits and social responsibility are not
necessarily mutually exclusive, there is frequently a price tag
associated with CSR projects and this creates a conflict: choose
the CSR project, or tailor the project to meet CSR objectives OR
focus on increased ROI? Where a project meets both objectives,
the conflict is eliminated but you know intuitively that this won't
always be the case and indeed there are more and more news
reports about cases where this wasn't the case.

How does the corporation determine what is socially responsible


and what isn't? This is seldom clear cut and in many cases
different social groups have goals and objectives that are opposed
to one another. The corporation can't satisfy the objectives of both
groups and will be seen as irresponsible when it chooses one or
the other.

(c

These issues are compounded when a corporate citizen of one


country engages in work in another with different social values.
The chances of a conflict between two social groups who are
stakeholders in the venture increase because of the cultural
differences between the stakeholders in the home community and
those in the foreign country. Companies have invested millions of
dollars developing their CSR persona only to see it destroyed by
one ugly conflict that gets media exposure. The results achieved
by the CSR investment are not newsworthy while the single
incident that tarnishes that image is.
Take the recent debate over the behaviour of Canadian mining
companies overseas and in South America for example. The media
exposure was triggered by a private members bill (C-300)
proposed by a member of the Canadian parliament. The bill asks
Contd...

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Project Management & Its Applications

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The debate on the bill has spawned two stories in the Toronto
Star about potential problems with mining operations in Ecuador,
Argentina, and Papua New Guinea. The stories include responses
from spokespeople of the mining companies involved, but the
exposure of these allegations in a national newspaper has
tarnished the CSR reputation built up by the mining companies
mentioned.

We won't mention those companies here because none of the


allegations has been proven. Some of the mining companies have
gone to great lengths and expense to build a reputation as
socially, economically, and ethically responsible corporate
citizens, only to see that reputation threatened by these stories.
Now, I'm not suggesting that the allegations are all false.
According to the article by staff reporter Brett Popplewell in the
Monday, November 23, 2009 edition of the Toronto Star, the
company is engaged in a project to build an open pit copper mine
in Ecuador. The mine has provided jobs for one Ecuadorian
community and is popular with it as a result. Another community
is fiercely opposed to the project because they fear the mine will
negatively impact their small farms and this has led to conflict
between the two communities. The Ecuadorian ministry of mines
is on-side with the project but apparently has done nothing to
quell the conflict between the two communities. Allegations have
been made by members of the opposed community that the guards
hired by the mining company have used excessive force in dealing
with protests against the mine.

(c

)U

___________________

that the federal government assume the power to investigate


complaints that any Canadian mining company failed to comply
with international human rights and environmental standards.
On the face of it, there doesn't seem to be anything a socially
responsible mining company could object to. The problem is that
the bill can't guarantee that the accused mining company would
have the ability to confront their accuser to answer the charges
and that is what the association representing Canadian mining
companies is objecting to.

Notes

PE

294

The guards, or course, are Ecuadorian citizens. Another story in


the same paper quotes an accusation of gang rape at a mine in
Papua New Guinea, again unproven. The latter allegation is so
serious that the paper did not mention the mining company the
accusation was levelled at (they did mention the company
involved in the Ecuadorian accusations). A third allegation
involved a company operating in Argentina. The allegation is that
the company used threats to force an Argentine government
official out of office.
The companies claim to have followed all the mining laws, rules,
regulations, and standards of the countries they are operating in.
They further claim to have followed their own code of ethics.
These ethics have been developed and implemented at significant
expense in some cases. In some cases the spokesperson answering
the allegations on behalf of the companies is the Vice President of
Corporate Responsibility which is some indication of the emphasis
placed on ethical behaviour by these companies. Whether or not
Contd...

UNIT 25: Case Study

Notes

___________________
___________________
___________________
___________________
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PE

The problems these companies are currently encountering can be


traced back to the factors previously mentioned. Implementing
the code of ethics crafted by their CSR organisations will
inevitably inflate costs at some point during some projects. Is it
possible for a corporation to have two organisations that are in
conflict? You bet. Remember we're dealing with people here and
as everyone who has worked with others knows, a working
relationship leads to differences of opinion. For a team working on
a project, the project manager will ask the team members to
forsake personal agendas for the good of the project. When the
conflicts are operational and conducted at the executive level this
approach doesn't always work.

295

these companies have been effective in adhering to the laws of the


countries they operate in and their own codes, it is apparent to me
that they have honestly tried to do so. What went wrong then?

)U

The initiation of the mining project, in the case of the Ecuadorian


mine, was enough to initiate a conflict between the two
communities in the area of the mine. One suspects that there may
have been issues between the two that pre-date the mine. So how
does all this concern the project manager? The issues the
Canadian mining companies are experiencing demonstrate the
difficulties it is possible to face when doing business in a foreign
country. These examples are probably extreme. I'm sure that not
many software projects will lead to a corporation facing
allegations of physical abuse or rape. On the other hand, the
underlying factors will affect any project. The question is what
can a project manager do to address these factors?
The first step is for the project manager to understand all the
issues that can affect the project, including pre-existing local
issues. Is it reasonable to expect a project manager to have
foreseen the conflict between the two communities involved in the
Ecuadorian dispute?
How to address the issue is another story. There may or may not
have been something the mining company could have done to
avoid the conflict but they should at least have anticipated the
risk of this happening and if no mitigation strategy was feasible
they could then have decided whether they wanted to assume the
risk. The object lesson for project managers here is that the
exercise of risk identification must be expanded to include not
only the risks of a culture clash between the foreign country
hosting the project and the corporation's country, but those of
different stakeholder groups within the host country.

(c

So how would a project manager go about identifying those risks?


The answer is that the investigative work required surpasses the
activities we normally associate with risk identification. Speaking
to members of both communities would have revealed pre-existing
conflicts, examining back issues of local newspapers and
interviews with local officials would be other sources for the
information. The lesson here is that you may have to expand your
risk identification exercise to include mining the information that
would help you identify risks.
Contd...

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Project Management & Its Applications

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This creates a Catch-29 situation for these corporations. If they


fail to pay a bribe when one is solicited, they risk incurring costs
that might far exceed the bribe solicited. Let's take the case of a
bribe solicited to pass imported equipment through customs. The
bribe doesn't violate local laws or norms. Failure to pay the bribe
will mean that the equipment languishes on a loading dock or
customs shed until the project manager either finds an
alternative solution that doesn't require the equipment or the
project fails. In either case the effect on the project budget is
catastrophic. Alternatively, the project manager could pay the
bribe and incur criminal charges in North America, which will
probably include fines the corporation has to pay. So what do you
do if you find yourself in this situation?
The answer is simple; don't find yourself in that situation. The
situation described above is untenable and no project manager
should be asked to expose themselves to that level of risk,
regardless of your views on bribes. You can avoid this situation by
investing a little time during the initiation phase of your project
to investigate the risks. What are the applicable laws of the
country the project, or portion of the project, will be performed in?
Will the project call for the importation of any equipment? What
are the laws in the corporate headquarters country pertaining to
conducting business in a foreign country? What are the
international laws pertaining to labour and human rights?
Perhaps the best way to approach the investigation is to look at
the project scope and your project management approach and
determine which questions you should ask.

(c

)U

___________________

There is another issue that has plagued corporations doing


business in foreign countries long before anyone ever heard of
CSR, namely the issue of a clash between the laws governing the
corporation in the country of origin and the laws and cultural
norms of the country hosting the project. The classic example of
this clash is the solicitation and payment of bribes. In many
countries outside of North America and Europe the solicitation of
bribes is not only legal, but is actually encouraged by the local
governments. Laws in North America make it illegal for
corporations to pay bribes even in foreign countries where doing
so is not illegal.

Notes

PE

296

Know the risks going in. Normally we think of risk identification


as a project planning process, but there are some risks which will
have a bearing on whether the corporation wants to undertake
the project, or whether you want to undertake managing the
process. These are the risks that will be identified by asking the
right questions. Once the risk has been identified, such as the risk
of being solicited for a bribe, you can then make the decision as to
whether there is a mitigation strategy that might work. If you
can't identify a workable mitigation strategy, does the corporation
want to undertake the project? Do you want to undertake
managing the project? Sometimes the situation calls for you to
ask the right questions of the right people before you commit to
the project.
Project managers must become knowledgeable about their
corporation's Corporate Social Responsibility policies so that the
Contd...

UNIT 25: Case Study

297

Notes

___________________
___________________
___________________
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___________________

PE

goals and objectives of their projects conform to these policies, but


they must go further than that. They must determine how well
those policies conform to international law and the laws,
standards, and social customs in the country where the project
work will be undertaken. They must also investigate all the
possible stakeholders in the host country to determine if there are
any conflicts with the corporation's CSR policies or with each
other. There really isn't anyone in a better position to do this
when you think about it. The project manager has the best grasp
of the project goals and objectives and management approach so is
the best qualified person to identify risks to the project.
The suggestions in this article are not meant to contradict the
best practices for risk management taught by project
management courses such as PMP courses or other PMP exam
preparation training, but rather to augment them. The strategy
you use to quantify, qualify, monitor, and control the risks once
you have identified them should be the same ones espoused in
these courses.

___________________

Question:

___________________

Analyse the case and discuss the case facts.

Source: http://www.projectsmart.co.uk/corporate-social-responsibility-and-project-

(c

)U

management.html

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Project Management & Its Applications

298

Notes
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(c

)U

___________________

PE

___________________

Glossary

Glossary

299

Notes

___________________

ACC (Additional Cost for Corporation): It represents the estimate for


the additional cost required for completing the project.
Activity: An activity is a definite task, job, or function to be performed in
a project.

___________________
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PE

Actual Cost for Work Performed (ACWP): This represents actual cost
incurred for accomplishing the work performed during a particular time
period.

___________________

Authority: The right to act in a specified way, delegated from one person
or organization to another.
Average Contingency: It is determined by examining the project
definition stage for each code of accounts and applying average
estimating accuracy factors appropriate for the specific project.

Bell Curve: The Bell curve is derived from the "S" curve and shows the
amount of vertical movement of the "S" curves (the rate of progress or
loading) for a finite time.

)U

Bid Price: A bid price is the highest price that a buyer (i.e., bidder) is
willing to pay for a good. It is usually referred to simply as the "bid."
Budgeted Cost for Total Work (BCTW): This is the total budgeted cost
for the entire project work.
Business Case: The information necessary to enable approval,
authorization and policy making bodies to assess a project proposal and
reach a reasoned decision.
Business Risk: Risk caused by the operating environment of the
business.
Capital Costs: One-time setup cost of a plant or project, after which
there will only be recurring operational or running costs.

Client: A person or organization using the services of a lawyer or other


professional person or company.

(c

Commercial Feasibility: A study of the proposed arrangements for the


purchase of raw materials and sale of finished products, etc.
Communication Channel: A medium through which a message is
transmitted to its intended audience, such as print media or broadcast
(electronic) media.
Constraints: Constraint is the element factor or a subsystem that works
as a bottleneck.

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Project Management & Its Applications

___________________
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Construction: Construction is a process that consists of the building or


assembling of infrastructure.

Notes

Contingency: It refers to costs that will probably occur based on past


experience, but with some uncertainty regarding the amount.
Correlation: Correlation is a measure of the statistical relationship
between two comparable time series.

Cost Contingency: The cost contingency which is included in a cost


estimate, bid, or budget may be classified as to its general purpose that is
what it is intended to provide for.

PE

300

Cost Control: The process or activity on controlling costs associated with


an activity, process, or company.
Critical Path Method (CPM): The critical path method (CPM) is an
algorithm for scheduling a set of project activities.
Cultural Feasibility: It deals with the compatibility of the proposed
project with the cultural environment of the project.
Definitive Estimate: A definitive estimate is prepared when basic
engineering is complete and preliminary bulk material take-offs have
been prepared.

(c

)U

Detailed or Check Estimate: A detailed or check estimate is prepared


on completion of design engineering when production drawings, final
material quantities and prices are known.
Econometric Model: An econometric model is one of the tools economists
use to forecast future developments in the economy.
Economic Feasibility: This involves the feasibility of the proposed
project to generate economic benefits.

Engineering Curves: It contains a tabular spreadsheet distributing


engineering planned progress and man-hour expenditures by discipline
from project start to mechanical completion.
Engineering: The branch of science and technology concerned with the
design, building, and use of engines, machines, and structures.
Equipment: Tangible property (other than land or buildings) that is used
in the operations of a business.

ERP (Enterprise Resource Planning) Software: These are the


software which cater to all functions of business process and which have
project management function as modules.
Errors: Belief or mental state that does not conform to objective reality;
where what is correct is actually incorrect and what is incorrect is
actually correct.

Glossary

Event: An event is a specific point in time indicating the beginning or end


of one or more activities and represents a milestone and does not consume
time or resources.
Execution: The carrying out or putting into effect of a plan, order, or
course of action.

Notes

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PE

Feasibility Analysis: The first stage in the process of project


development.

301

Evaluation: It is the comparison of actual results, with anticipated


results on the basis of objectives of an information organisation.

Financial Feasibility: It involves the capability of the project


organization to raise the appropriate funds needed to implement the
proposed project.

Fixed Capital: It refers to any kind of real or physical capital that is not
used up in the production of a product and is contrasted with circulating
capital such as raw materials, operating expenses and the like.
Float: Float will show up if material deliveries are ahead of the
construction material required dates.

Individual Discipline Curves: It shows individual discipline curves


plotted over the scheduled completion time for the discipline.

)U

Initiation: Initiation is a rite of passage ceremony marking entrance or


acceptance into a group or society.

Inventory: A complete list of items such as property, goods in stock, or


the contents of a building.
Isometrics: A system of physical exercises in which muscles are caused
to act against each other or against a fixed object.
Kick-off Meeting: Gathering of interested parties to discuss a plan or
strategy before launching a program or project.
Known Unknowns: They are risks that have been identified, analysed
and it may be possible to plan for them. They are identifiable sources of
uncertainty.

(c

Labour: The aggregate of all human physical and mental effort used in
creation of goods and services.
Leadership: Leadership has been described as a process of social
influence in which one person can enlist the aid and support of others in
the accomplishment of a common task".

Manager: A Manager is the person responsible for planning and


directing the work of a group of individuals, monitoring their work, and
taking corrective action when necessary.

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Project Management & Its Applications

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Man-hours: A series of typical overall construction curves for one million


labour man-hours spread over a construction duration of 6 to 36 months.

Notes

Manpower Forecasting: The process of calculating how many


employees will be needed in the future, and how many will actually be
available.

Manpower: Total supply of personnel available or engaged for a specific


job or task.
Milestone: This is very easy to use software and very useful in preparing
level-1 schedules.

PE

302

Network Diagram: Network diagram is a schematic representation of


the interactions of devices on a network.
Nonlinearity: Nonlinearity is the behaviour of a circuit, particularly an
amplifier, in which the output signal strength does not vary in direct
proportion to the input signal strength.
Operating Cost: Operating costs are the expenses which are related to
the operation of a business, or to the operation of a device, component,
and piece of equipment or facility.
Optimistic Time: The optimistic time, to is the time required if no
hurdles or complications arise.

(c

)U

Order of Magnitude Estimate: An order of magnitude estimate is


derived from curves or returns costs from previous projects and is
prepared in the conceptual stage.
Orderliness: Orderliness is having a sense of where things belong and
how they relate to each other, and keeping them organized accordingly.
Overlap: Overlap will show up if drawing or material deliveries are later
than the construction required dates.
Overruns: Instance of something exceeding an expected or allowed time
or cost.
Performance Evaluation: It helps to assess how well a system or
service is working with respect to some predefined measures.
Performance Measurement: It means investigating and measuring how
well an operational system meets the needs of its users.
Performing Organisation: It refers to the enterprise whose employees
are most directly involved in doing the work of the project.

Pessimistic Time: The pessimistic time, tp, is the time required if


unusual complications and, or unforeseen difficulties arise.
Plant Design System (PDS): This system allows construction of 3-D
model and is very useful in piping/cable routing as it allows immediate
review with regard to fouling/clashes of piping.

Glossary

Preliminary Control Estimate: A preliminary control estimate is


prepared when the process design is complete and equipment data and
sizes are available.
Primavera Project Planner (P3): P3 is one of the products of PM
family products offered by Primavera Inc.

Notes

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PE

Procurement: Procurement is the acquisition of goods, services or works


from an external source.

303

PM Software: These are software specially designed for PM function.

Procurement Cycle: It lists the sub-activities which must be performed


from the inquiry requisition to purchase order placement and receipt of
vendor drawings.

Procurement Planning: Procurement planning is the process of


identifying which part of the project should be procured from resources
outside of the organization.
Product Description: The product description defines the details and
requirements for acceptance of the project.
Productivity: It is the ratio of net outputs to inputs.

)U

Program Evaluation Review Technique (PERT): The Program (or


Project) Evaluation and Review Technique, commonly abbreviated PERT,
is a statistical tool, used in project management, that is designed to
analyze and represent the tasks involved in completing a given project.
Project Budget: The amount and distribution of money allocated to a
project.

Project Cycle: A collection of generally sequential project phases whose


name and number are determined by the control needs of the
organisation/s involved in the project.
Project Execution and Control: Project Execution and Control is where
most of the resources are applied/expended on the project.
Project Identification: A repeatable process for documenting,
validating, ranking and approving candidate projects within an
organization.

(c

Project Initiation: To define the overall parameters of a project and


establish the appropriate project management and quality environment
required to complete the project.
Project Integration Management: A subset of project management
that includes the processes required to ensure that the various elements
of the project are properly coordinated.
Project Management Life Cycle: The project management life cycle
defines how to manage a project. It includes processes such as origination,
initiation, planning, execution/control, and closeout.

___________________
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Project Management & Its Applications

___________________
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___________________
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___________________

Project Management Software: Project Management Software are


software programs that help with applying knowledge, skills, tools and
techniques to plan and control resources, costs and schedules to meet the
requirements of the particular project and include such integrated
functions as calendars, charts, tracking of people and budgets, generating
of reports and scheduling.

Notes

Project Management: Project management is the discipline of planning,


organizing, motivating, and controlling resources to achieve specific goals.

PE

304

Project Manager: A project manager is a professional in the field of


project management and can have the responsibility of the planning,
execution and closing of any project, typically relating to construction
industry, architecture, Aerospace and Defence, computer networking,
telecommunications or software development.
Project Origination: In Project Origination an individual proposes a
project to create a product or develop a service that can solve a problem or
address a need in the Performing Organization.
Project Planning: The purpose of project planning and scoping is to first
identify the areas of the project work and the forces affecting the project
and then to define the boundaries of the project.

(c

)U

Project Procurement Management: A subset that includes the


processes required to acquire goods and services to attain project scope
from outside the performing organisation.
Project Procurement: Project procurement involves a systematic
process of identifying and procuring, through purchase or acquisition,
necessary project services, goods, or results from outside vendors who will
carry out the work.
Project Risk: Risk caused by uncertain events or situations that can
adversely affect a project as planned.
Project Scope: Various parameters those affect the project in its
planning, formulation and execution.
Project: Planned set of interrelated tasks to be executed over a fixed
period and within certain cost and other limitations.
Responsibility: A duty or obligation to satisfactorily perform or complete
a task that one must fulfil, and which has a consequent penalty for
failure.
Revenue: The amount of money that a company actually receives during
a specific period, including discounts and deductions for returned
merchandise.
Rework Cycle: It accounted to a large degree for the success or failure of
a development effort.

Glossary

Risk Management: Concerned with identifying all foreseeable risks


reasonably, assessing the probability and severity of the risk and deciding
course of action to reduce their possible impact or avoid them altogether.
Risk: Defined as probability or chance of occurrence of adverse effect on
projects objectives like cost, time and quality.

Notes

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PE

"S" Curve: A basic "S" curve is drawn on a grid with a horizontal axis
showing percentage calendar time from 0 to 100% and a vertical axis
showing percentage completion from 0 to 100%.

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Ripple Effects: Ripple effects are the primary impacts of controlling


feedback on rework and productivity.

Safety Feasibility: It refers to an analysis of whether the project is


capable of being implemented and operated safely with minimal adverse
effects on the environment.
Sensitivity Analysis: Sensitivity Analysis is an assessment process that
compares the expected results with the possible results.

Social Feasibility: It addresses the influences that a proposed project


may have on the social system in the project environment.
Team Members: A person belonging to a specific group of people involved
in attempting to achieve a common goal.

)U

Technical Evaluation: Tests or studies conducted to investigate and


determine the technical suitability of an equipment, material, product,
process, or system for the intended objectives.

Technical Feasibility: This area reviews the engineering feasibility of


the project, including structural, civil and other relevant engineering
aspects necessitated by the project design.
Unacceptable Curves: It shows unacceptable drawing curves (in heavy
dotted line) in relation to the drafting discipline progress curves.
Unknown Unknowns: These cannot be managed although they may be
addressed them by applying a general contingency based on past
experience with similar projects.
Unsuitable Curves: It includes curve shapes that are unacceptable for
engineering disciplines.

(c

Variance Analysis: It involves a comparison of the actual cost incurred


on the project with the budgeted cost of the project for a given time period
to determine the variants.
Variations: Inevitable change in the output or result of a system
(process) because all systems vary over time.
Vendor Selection: The process by which an organization evaluates and
decides with which suppliers they will conduct business.

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Project Management & Its Applications

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Work Breakdown Structure (WBS): The entire process of a project may


be considered to be made up on number of sub process placed in different
stage called the Work Breakdown Structure (WBS).

Workflow: The sequence of industrial, administrative, or other processes


through which a piece of work passes from initiation to completion.
Working Capital: Working capital is defined as the difference between
current assets and current liabilities.

(c

)U

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Vendor: A vendor is any person or company that sells goods or services to


someone else in the economic production chain.

Notes

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